International Forecaster Weekly

HOW CAN THERE BE A RECESSION WITH 517,000 NEW JOBS AND 3.4% JOBLESS RATE? It’s Pretty Straightforward: Jobless Rate Is 6.6%, Not 3.4%

Eternal optimist Treasury Secretary Janet Yellen says she sees a path for avoiding a recession, with inflation down significantly and the economy remaining strong, given a strong jobs market.

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen exclaimed.

"What I see is a path in which inflation is declining significantly and the economy is remaining strong."

Of course, being the team player she is, Yellen said inflation remains too high.

But she believes it could fall a lot more because of action taken by the Biden administration, including steps to reduce the cost of gasoline and prescription drugs.

Labor Department data out last Friday showed job growth jumped up steeply in January – nonfarm payrolls leaped by 517,000 jobs and the headline unemployment rate dropped to a 53-and-a-half-year low of 3.4%.

The strength in hiring, despite growing layoffs in tech, overnight reduced investor expectations that the Federal Reserve was close to pausing its cycle of hiking interest rates.

Unemployment is Higher Than What They Tell Us

Guest Writer | February 8, 2023

By Dave Allen for Discount Gold & Silver

Eternal optimist Treasury Secretary Janet Yellen says she sees a path for avoiding a recession, with inflation down significantly and the economy remaining strong, given a strong jobs market.

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen exclaimed.

"What I see is a path in which inflation is declining significantly and the economy is remaining strong."

Of course, being the team player she is, Yellen said inflation remains too high.

But she believes it could fall a lot more because of action taken by the Biden administration, including steps to reduce the cost of gasoline and prescription drugs.

Labor Department data out last Friday showed job growth jumped up steeply in January – nonfarm payrolls leaped by 517,000 jobs and the headline unemployment rate dropped to a 53-and-a-half-year low of 3.4%.

The strength in hiring, despite growing layoffs in tech, overnight reduced investor expectations that the Federal Reserve was close to pausing its cycle of hiking interest rates.

Unemployment is Higher Than What They Tell Us

Here’s the thing: unemployment in America is closer to 6.6%, roughly twice the 3.4% that politician, pundits and the media claim it is.

The chart above, from the St. Louis Fed, shows a stark contrast between the headline unemployment rate (the Bureau of Labor Statistics’ U-3 rate) and its more encompassing U-6 rate.

The U-6 rate measures the total number of employees in the U.S. that are a part of the labor force but are without a job. 

It differs from the near universally reported U-3 rate in that it also includes workers that are discouraged and underemployed. 

Some say this distinction is like counting peas in a pod, that its use is fine as long as any historical analysis is an apple for apples comparison.

I disagree in a fundamental sense. U-6 gives us a clearer look at how the economy is functioning, because it captures a larger labor force.

U-6 is defined by the BLS as:

  • The U-3 rate;plus 
  • All people who are “marginally attached to the workforce” (i.e., those who are “neither working nor looking for work but want and are available for a job and have looked for work sometime in the past 12 months)”;plus
  • “Discouraged workers, a subset of the marginally attached, who have given a job-market related reason (as defined by the BLS) for not currently looking for work;”plus
  • “Persons employed part time for economic reasons (i.e., those who want and are available for full-time work but have had to settle for a part-time schedule).”

Yellen told ABC’s Good Morning America that reducing inflation remained Biden's top priority, but the economy was "strong and resilient."

She pointed to three laws – the Inflation Reduction Act, the CHIPS Act and the massive infrastructure package – that she said would help drive a inflation down, along with a price cap imposed on the cost of Russian oil.

The Debt Ceiling Held Hostage

Yellen also called on Congress to raise the nation’s debt limit, warning that failure to do so would cause "an economic and financial catastrophe."

"While sometimes we've gone up to the wire, it's something that Congress has always recognized as their responsibility and needs to do again."

The government hit its $31.4 trillion debt ceiling last month, prompting the Treasury Department to warn that it may not be able to hold off default past early June.

President Biden met with House Speaker Kevin McCarthy last week to feel out each other on the debt limit and have agreed to meet again, but the impasse has left investors feeling queasy.

McCarthy called on the president to compromise and agree to spending cuts, as the two remain deadlocked over raising the nation's $31.4 trillion debt ceiling. Biden has previously said he won’t negotiate the debt limit.

McCarthy promised that Social Security and Medicare cuts will be off the table during negotiations over a debt limit increase.

He’s no doubt trying to deliver on promises he’s made to fellow Rs to reduce spending, which gets a lot harder when major programs are exempt from cuts.

Biden’s outgoing chief economic adviser Brian Deese says to expect the president to insist that raising the debt limit is not negotiable and that lawmakers should not use it as a "bargaining chip."

"This bedrock idea that the United States has met all of its financial obligations for its existence as a country isn't something that anybody should be using as a bargaining chip.” 

McCarthy, whose fellow Republicans won a slight majority (of four members) in the House in November's election, said:

"Finding compromise is exactly how governing in America is supposed to work and exactly what the American people voted for just three months ago."

House Republicans want to use the debt ceiling, which covers the spending programs and tax cuts Congress previously approved, as leverage to push spending cuts.

Biden seemed to question McCarthy's ability to keep Republicans in line last week, noting the concessions he made to become speaker in January. 

Those included changing a House rule that allows any one member to call for a vote that would remove him, rather than requiring a majority from either party.

How to Make it Better

As someone who has worked among Washington policymakers and follows the federal budget process and its impacts closely, I believe that Congress has to once and for all remove standalone legislation on raising the debt limit.

The time for these discussions is during formulation of Congress’ annual budget and appropriations bills.

Some have suggested that the least risky thing to do is to simply suspend the debt ceiling and have it rise – or fall! – based on the total spending and revenues in a given fiscal year.

You might think that gives Congress free reign to do as it pleases – i.e., to cut taxes and/or raise spending ad infinitem. Well, they already have free reign in a nation with $31.4 trillion in gross debt.

Instead, the nonpartisan Committee for a Responsible Federal Budget recommends these broad categories of reforms to the debt ceiling:

  • Link changes in the debt limit to achieving responsible fiscal targets so Congress would not need to increase the debt ceiling if fiscal targets are met;
  • Debate the debt limit when Congress is making decisions on spending and revenue levels, not months after those decisions have been made;
  • Apply the debt limit to more economically meaningful measures, like debt held by the public or debt as a share of GDP;
  • Replace the debt limit with limits on future obligations (i.e., spending).

These reforms certainly aren’t a panacea for what ails us, but they’re an important part of a package of changes that we need if our constitutional republic is to survive, if not thrive, well into the 21st century and beyond.