As election year heats up, we keep hearing conflicting reports about the labor market’s gains from the economic recovery.  At times, the arguments are reminiscent of the “Who’s on First” routine that Abbot and Costello were so famous for.  Here is some of that same logic to help us understand how the number of people without jobs is going up while the unemployment rate is going down.

COSTELLO: I want to talk about the unemployment rate in America.
ABBOTT: Good Subject. Terrible times. It’s 9%.
COSTELLO: That many people are out of work?
ABBOTT: No, that’s 16%.
COSTELLO: You just said 9%.
ABBOTT: 9% Unemployed.
COSTELLO: Right 9% out of work.
ABBOTT: No, that’s 16%.
COSTELLO: Okay, so it’s 16% unemployed.
ABBOTT: No, that’s 9%…
COSTELLO: Wait a minute. Is it 9% or 16%?
ABBOTT: 9% are unemployed. 16% are out of work.
COSTELLO: If you are out of work, you are unemployed.
ABBOTT: No, you can’t count the “Out of Work” as the unemployed.  You
have to look for work to be unemployed.
COSTELLO: BUT THEY ARE OUT OF WORK!
ABBOTT: No, you miss my point.
COSTELLO: What point?
ABBOTT: Someone who doesn’t look for work, can’t be counted with
those who look for work. It wouldn’t be fair.
COSTELLO: To whom?
ABBOTT: The unemployed.
COSTELLO: But they are ALL out of work.
ABBOTT: No, the unemployed are actively looking for work. Those who
are out of work stopped looking. They gave up. And, if you give up,
you are no longer in the ranks of the unemployed.
COSTELLO: So if you’re off the unemployment rolls, that would count
as less unemployment?
ABBOTT: Unemployment would go down. Absolutely!
COSTELLO: The unemployment just goes down because you don’t look for work?
ABBOTT: Absolutely it goes down. That’s how you get to 9%.
Otherwise it would be 16%. You don’t want to read about 16%
unemployment do ya?
COSTELLO: That would be frightening.
ABBOTT: Absolutely.
COSTELLO: Wait, I got a question for you. That means they’re two
ways to bring down the unemployment number?
ABBOTT: Two ways is correct.
COSTELLO: Unemployment can go down if someone gets a job?
ABBOTT: Correct.
COSTELLO: And unemployment can also go down if you stop looking for a job?
ABBOTT: Bingo.
COSTELLO: So there are two ways to bring unemployment down, and the
easier of the two is to just stop looking for work.
ABBOTT: Now you’re thinking like an economist.
COSTELLO: I don’t even know what I just said!
And now you know why unemployment figures are improving!

For a more serious treatment of the issue, watch this 8 minute video by Brian Westbury, chief economist at First Trust.

[youtube=http://www.youtube.com/watch?v=fS_LpEs-4Uo&w=480&h=360]

Brian points out that over the last several decades, the official unemployment rate, (currently 8.3 %) is almost perfectly correlated with the jobless rate (aka The U-6 Index) which is currently 15%. Mathematically, the U-6 index is consistently 1.8 times the official unemployment number, and since that ratio has not changed, the gap between the two is not increasing because more people have simply stopped looking for a job.  He does suggest that the gap may widen with the aging of our population as the percentage of people over age 60 who want to remain increases.

While we can debate how to best measure unemployment,  a couple of facts are evident:

1.  The U.S. added more than 200,000 jobs for the third consecutive month.  (WSJ – 3/10/2012)

2.  This job growth was predicted by the Vistage Q4 2011 CEO Confidence Index at the end of last year.  Here is a quick summary of those results.

Vistage members were not only more optimistic about prospects for the national economy, but also about the outlook for their own firm’s performance during the year ahead.  The Vistage CEO Confidence Index was 98.8 in the fourth quarter 2011 survey, up from 83.5 in the third quarter and reaching the highest level since the start of 2011 (105.2).

Below are some key highlights from the Q4 Vistage CEO Confidence Index:

• 41% of CEOs recognized improved economic conditions over the previous 12 months, up from just 18% in the Q3 survey.
• Only 12% of CEOs thought the economy had recently worsened.
• 73% of CEOs expected revenue growth.
• 55% of CEOs said they plan to increase the number of their employees over the next 12 months, compared with 46% in the Q3 survey.
• 43% of CEOs said the European debt crisis impacts their business.
• 24% of CEOs are finding it easier to obtain credit for their business today compared to 6 months ago.
• 49% of CEOs believe Mitt Romney will emerge as the Republican Presidential Nominee for 2012, while 29% believe it will be Newt Gingrich.

The Vistage CEO index has become a very reliable and accurate predictor for the economy and job growth 2 quarters out.  Having these insights into the future provides a competitive advantage to Vistage member companies, and is one of the many reasons that they consistently outperform their non-member peers.

The Q1 2012 CEO confidence index is currently being compiled, and I will post an update in early April