Don't Worry About the Unemployment Rate

I'm referring to the theory about the worrisome unemployment rate in the U.S. The theory goes something like this: The unemployment rate -- most recently measured at 9.7% -- remains doggedly high. That means that folks are out of work and can't shell out for consumer goods like Apple (Nasdaq: AAPL) iPods, Starbucks (Nasdaq: SBUX) lattes, and Activision Blizzard (Nasdaq: ATVI) video games.

That, in turn, means that suppliers of intermediate goods like Intel (Nasdaq: INTC) and Qualcomm (Nasdaq: QCOM) see demand fall. Businesses become reluctant to spend, eschewing a big tech upgrade with Oracle (Nasdaq: ORCL) or canning that new headquarters that would have benefitted materials producers like Alcoa (NYSE: AA). Companies get worried, lay off workers to "optimize" operations, and the cycle deepens.

Hello, reality -- good to see you
Looking at history as a guide, though, I found that the unemployment rate -- though easy enough to track and understand -- isn't really a good measure of what to expect from the economy.

I went ahead and borrowed some data from the U.S. Bureau of Labor Statistics to illustrate the relationship. Thanks to the great people at the National Bureau of Economic Research, I was able to pinpoint the quarter that the U.S. pulled out of recession in every business cycle since 1949 and see what the unemployment rate looked like as the economy bottomed.

Sources: Bureau of Labor Statistics and National Bureau of Economic Research.

As you can see from the table, in nearly every case, the unemployment rate was rising even as the recession was coming to an end. In fact, in a number of these cycles, if we look at the quarter following the recession's end, unemployment stayed the same or even climbed despite significant economic growth.

What does this say? Well, it certainly speaks poorly of the predictive power of the unemployment rate.

There are plenty of numbers in the sea
Fortunately, the unemployment rate isn't the only employment-related number that we can look at when it comes to evaluating the economy's health. There are actually two numbers that are considered "leading economic indicators" that we can look at -- initial unemployment claims and the average workweek.

Initial unemployment claims skyrocketed during the recession, jumping from a four-week average of 440,000 in early September of last year to more than 650,000 in early April. The most recent four-week measure was 570,000, well down from that April high note.

Be forewarned though, even the monthly average for claims tends to be very volatile and can jump around from week to week and month to month. But what should be noted is the downward trend that claims have taken from the early spring.

The average workweek, meanwhile, slid from 33.9 hours in mid-2007 to a low of 33 hours in June of this year. Preliminary numbers for July and August show that number at 33.1, a tepid suggestion that this data point is also moving in the right direction.

Fishing with fairies
Yesterday, my fellow Fool Amanda Kish penned a piece -- titled "Unemployment: It's Worse Than You Think" -- reviewing the potential to end up unemployed in this economy and how to fortify your financial position in case you find yourself in that unenviable position. Her advice hits the bull's-eye and I think we can all benefit from her defensive tips.

However, investors sitting on the sidelines waiting for a green light from the Unemployment Rate Fairy before putting their cash to work may end up disappointed. Economic recovery generally seems to be fleet of foot compared to the plodding unemployment rate, and investors sitting on the bench may be left wondering how they missed the turn.

© 2009 UCLICK, L.L.C