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Christmas is Coming, Where is the United States Economic Recovery?

James Glassman, Managing Director and Senior Economist of JP Morgan Chase & Co., delivered remarks about the state of the economic recovery and how the changing economy will affect the U.S. business community at Wilkin & Guttenplan P.C.’s Second Annual Economic & Industry Outlook Forum.

So where exactly is the United States economic recovery?

While many believe that the U.S. economic recovery is in the 9th inning approaching full employment, Glassman sees the recovery really being more in the 5th inning.   So, what’s the real meaning of the “Unemployment Rate” and what role does it and inflation play in the recovery?

The US government’s official unemployment rate (U-3)* doesn’t really include those who completely disappeared from the employment market and for example, those college grads from 2008 – 2010 who never really entered the job market.  By including those groups (the U-6 Unemployment Rate**), the unemployment rate is 11.8% as of the close of September, 2014, significantly higher than the published 5.9% U-3 rate for the same period. Hence, the Fed continues to look not only at the classic U-3 rate, but also at the U-6.  Given that the Fed’s target “feel good” inflation rate is 2%, which is the generally acceptable rate for the global central banks and U-6 is currently at 11.8%, there is certainly more room for growth in the U.S. economy. So, while U-3 moves closer to full employment, U-6 numbers remain high.  When coupled with the 1.5% nominal inflation rate being below the Fed’s target 2% rate, there are significant growth opportunities ahead, hence Glassman’s analogy of the US economy being in the 5th inning makes sense.   Other global economies like the EU and Japan continue to lag behind; their central banks will likely continue to focus on maintaining lower interest rates for the foreseeable future.

* U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate).  See –   http://www.bls.gov/lau/stalt.htm

** The U-6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts “marginally attached workers and those working part-time for economic reasons.” Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the “marginally attached workers” include those age 16 and over who have gotten discouraged and stopped looking, but still want to work.

Note: The six state measures of unemployment used by the Bureau of Labor Statistics are based on the same definitions as those published for the United States:

U-1, persons unemployed 15 weeks or longer, as a percent of the civilian labor force;

U-2, job losers and persons who completed temporary jobs, as a percent of the civilian labor force;

U-3, total unemployed, as a percent of the civilian labor force (this is the definition used for the official unemployment rate);

U-4, total unemployed, plus discouraged workers, as a percent of the civilian labor force plus discouraged workers;

U-5, total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers; and

U-6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.