What is the best indicator of an economic recovery?
- The number of jobs added. (52%, 23 Votes)
- The unemployment rate. (34%, 15 Votes)
- Home prices. (14%, 6 Votes)
Total Voters: 44
The nationwide unemployment rate is slowly decreasing, hinting at a recovering jobs market. However, reports on unemployment rates, rather than employment rates, can be misleading.
Specifically, the unemployment rate does not reflect the more significant labor force participation (LFP) rate and, for housing, employment rates.
The LFP rate reflects the share of individuals that are either currently employed or actively conducting a job search.
Alarmingly, declines in the LFP rate completely nullify decreases made in the unemployment rate since the end of the 2008 recession, as reported by the Century Foundation. This means that instead of more individuals finding jobs, more people are exiting the labor force entirely – in a word, retiring.
20-25% of the decline in the LFP rate is due to planned retirement as the population continues to age. However, the rest is due to individuals giving up on finding a new job, in a sense being forced into early retirement.
When these factors are considered, it’s clear the unemployment rate so widely touted by the media alone says little about the recovering jobs market and in turn the economy.
first tuesday insight
Americans who rely on unemployment rate figures eagerly expect the full recovery to arrive at any moment. Even the Federal Reserve (the Fed) relies on the falling unemployment rate to mark the coming end to their economic stimulus.
But they’re looking at the wrong set of numbers to set their stimulus projections, unless they anticipate a return of 75% of the current drop-outs from the labor force to drive up the unemployment rate. Unemployment is meaningless, and utterly disconnected to housing demand.
The nationwide unemployment rate is 7.6% as of June 2013, down from a high of 10% in 2009. The Fed has promised to keep short-term interest rates low until the nation’s unemployment rate reaches 6.5%. Alternatively, California’s unemployment rate is now 8.5%. This rate is likely to stall or rise over the next two years, despite more jobs being added.
The falling unemployment rate in June caused mortgage rates to spike as the bond market reacted to the announcement. Investors sensed the Fed will soon taper its mortgage-backed bond buying stimulus program due to the lower unemployment rate and a perceived strong and inflationary growth going forward.
Higher rates on 30-year mortgages instantly decreased buyer purchasing power, harming end user homebuyers and resale prices, and dampening our still fragile housing recovery.
A better sign of the recovery’s progress?
Jobs, which show the actual number of individuals employed in California. The number of those employed gives us a more complete picture of today’s housing market. (And in the terms of real estate, only the employed can purchase a home, the unemployed cannot.)
As of June 2013, California still had to regain 638,000 jobs just to reach the pre-recession level of employment. We are now six years on from that point and about 60% along on the path to full recovery. Depressing, in light of the likelihood it will take another three and a half years to get there.
Thus, we are likely to return to pre-recession job levels in 2016 as the California economy is expected to maintain today’s pace. With the intervening population increase of roughly 1% annually, it will take an additional three to four years to fully recover all ground lost.
Erroneous beliefs in the abstract unemployment rate may lead to a serious misstep in the real estate market’s recovery if the Fed eases off their stimulus efforts too soon. Even the thought of the Fed ceasing their stimulus caused rates to shoot up this past June.
What will happen if the Fed actually does cut off the stimulus before end users are ready with jobs to support the normal housing market of 60,000 monthly sales volume and meet mortgage lender demands?
Here’s a hint: the recovery will be prolonged indefinitely, crippling the housing market.
Re: The depressing reality of ‘the recovery’: Americans aren’t getting jobs. They’re retiring. From the Washington Post.