If you saw this graph, what would your thoughts be?
a) Why doesn't he label his axes?
b) Pretty linear, with relatively few outliers and an R-squared of > 0.95.
c) Negative slope, with a rate decreasing of 0.002 somethings per something.
d) All of the above.
e) Seriously, why doesn't he label his axes?
As you may have guessed, the correct answer is d. The graph is not in fact a titration curve in a middle school science fair project (though that would explain the axes), but rather several years of unemployment data.
Before I go any further with unemployment, I have to clear things up a bit. Unemployment is tough to talk about. It vies with the Dow Jones for being the most overrated statistic by the media. Calling it data is very generous.
It is from a survey (providing large error bars that are rarely reported).
It is a different survey than that of business job creation (providing confusion).
It is not supposed to be revised. Although sometimes it is.
It changes by such small amounts that rounding plays a large part in reporting.
Even the definition is weird. When I say "unemployment" I mean U3, which is "unemployed people" / "workforce". Workforce is defined as unemployed people plus employed people, so you can see the circular reasoning starting to take effect. Unemployed people have to be >16 yrs. old and actively looking for work (last 4 weeks). If you're not looking for work you are just... there. Some people like talking about U6 (including discouraged and underemployed), but that starts to open lots of doors that I won't get into now.
Then you add the political aspect. This is not a political blog, so I'll actively try to show many sides of things (and vigorously poke fun at them), but you can imagine what gets twisted when there are many interpretations of a statistic.
Okay. Back to the BBQ recovery. The point of this post is just to point out the linearity of our downward trend and some possible consequences. It is important to note that over a longer time (pre-Fall 2009 or some unknown time in the future) the linearity goes away. Everything is linear if you zoom in close enough. I say this as a caveat to the whole idea of modeling the unemployment rate. Future posts will deal with whether or not this is a generalizable phenomenon. So. Lets get to it!
Track my work!
In November 2012, I started by making up a column of dates and the corresponding unemployment rates (BLS). I went back to October 2009 mainly because it was the highest unemployment rate in my lifetime, and I was interested in the influence of U3 on the election. A happy side effect is that Oct '09 marks the end of The Recession and start of The Recovery. I had always thought that U3 would be somewhat sinusoidal, but was startled to see how linear it was (see graph above). Now, if you extrapolate forward you get some interesting numbers!
March 2013- 7.63%
Two weeks ago the March numbers came out, and the actual U3 was 7.6%, so we are looking good so far. One possibility is to add data and keep updating the fit, but I will still keep the original guesses for posterity.
January 2014- 7.0%
A happy new year indeed, though this number wouldn't come out until the first week of February. A happy ground hog day indeed!
September 2014- 6.5%
An important marker! The federal reserve has stated that this number is it's goal. Once U3 reaches 6.5% they will most likely stop quantitative easing. Maybe even before if it looks like they will get there anyways. I could do a whole post on this but basically it means bond rates will go up and so will mortgage rates. You might even earn a bit more on your bank account interest rates and CD rates, though I wouldn't hold my breath. There is one small problem with this though. As interest rates rise and bonds become more attractive, economic growth slows down because the federal reserve took all the free money away. Then again, that could prevent further bubbles, which is kind of the other half of the federal reserve's job. Nice job federal reserve!
Unfortunately, slower growth might cause the U3 graph to become non-linear, throwing off all further predictions. But let's pretend it doesn't.
June 2015- 6.0%
We drop down to the rate we were at in July 2008 when the McCain team famously said that we were in a mental recession, and gave Obama a talking point for the next 4 months. (In fact we had been in recession for 6 months already and would be for another year.)
July 2016- 5.2%
We reach the average rate over the entire Bill Clinton - George W. Bush era. (Not that presidents really change the unemployment rate themselves.) Anyways, it's not a round number, but probably the most reasonable goal for a second term Obama to feel vindicated. Not that that will matter as we will have new candidates to
As an aside- it seems odd that you will still know quite a few unemployed people (~ half as many as Oct '09). It just won't feel like it. It will feel like a 3-4% U3, because U6 will have dropped so much. Hopefully.
June 2018- 3.8%
We reach the lowest rate in the in my lifetime. President Joe Biden and VP Rand Paul give each other high-fives in the back halls of congress. We are basically left with frictional unemployment (where everyone's dream job is out there waiting for them and they just haven't found it yet). What? We haven't broken our linear fit yet? Lets keep going!
October 2023- 0%
Now your dream job actively seeks you out. All work is volunteer because all goods are made by robots running on rainbows. President Rand Paul and VP Joe Biden (having voluntarily switched roles in 2020) are seen high-fiving robots in the halls of congress.
So yeah. It can get pretty silly, but the bottom line is that the graph is linear for now. Until we lose linearity, the best guess for next month's U3 in this BBQ recovery will be this month's rate minus 0.06% (0.002% per day). Next installment of this series will deal with what history can tell us about when we lose linearity.
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