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Does sub-8 percent unemployment mean anything?

October 12, 2012

| MoneyRates.com Senior Financial Analyst, CFA

Last Friday the Bureau of Labor Statistics announced that in September, the U.S. unemployment rate dropped below 8 percent for the first time since 2009, falling to 7.8 percent. Obviously, any progress in reducing unemployment is good news, but a closer look at the employment picture shows that this recent improvement is far from an overwhelming success.

A closer look

Here are some notes on how good September's employment report really was, and what effect if might have on the election and the economy.

  1. Is 7.8 percent good? While this is the lowest unemployment has been in over three-and-a-half years, from a historical perspective 7.8 percent is still high unemployment. Over the last 50 years, unemployment has averaged 6.1 percent. In that 50 years, there have really only been two previous periods where unemployment was 7.8 percent or higher for several months: the mid-1970s and the early 1980s.
  2. Is employment gaining momentum? The drop in the unemployment rate was helped by revisions to prior estimates and other technical adjustments. Employers only created a net total of 114,000 new jobs in September, which is not a strong number. The average monthly gain in 2012 has been 146,000 new jobs, and for 2011 it was 153,000.
  3. Will this affect the election? The unemployment rate is now right where it was when Barack Obama took office, so at best this latest drop in unemployment may have neutralized the jobs issue rather than made it a positive for Obama. Over the past 50 years, the only two incumbents with unemployment rates of 7.5 percent or higher this late in their re-election campaigns were Gerald Ford and Jimmy Carter -- and neither one fared too well.
  4. Will this change Fed policy? Improving employment has been a big goal of the Fed's aggressive interest rate policies, and it's doubtful that this one report will give them enough confidence to back off of those policies. In the near-term, a spike in inflation is more likely to get the Fed to change course than improvement in unemployment.
  5. Will this help savings accounts? CD, savings and money market rates have been among the victims of the weak economy, so will strength in employment help rates rise? Not immediately. For savings accounts and other deposits, you'd have to look at this as just a very small step in the right direction. Only when a positive employment trend has been sustained enough to improve the lending environment will most banks step up to the plate with higher rates on savings accounts.

Although round numbers like 8 percent become psychological barriers in finance and economics, the 0.3 percent improvement that drove the unemployment rate below 8.0 percent is probably not substantial enough to have much of a ripple effect, either on the economy or the election. However, if followed up by a similarly strong gain in October, the momentum could be significant. To add a bit of drama, that next unemployment report will come out just four days before the election.

Your responses to ‘Does sub-8 percent unemployment mean anything?’

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jim

15 October 2012 at 4:31 pm

I am still not so sure that the unemployment rate is positive. When you look at it, the rate does not take into account those who have stopped searching for jobs. Employment news such as this might need to be taken with a grain of salt.

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