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The Unemployment Rate and Investment Markets

September 2008
by FX-Auto

If you pick-up almost any business journal, you’ll see a reference to the monthly unemployment rate. This number is almost as ubiquitous as the monthly GDP figures or the monthly housing price percentage decreases or increases that are plastered all over the news. This monthly unemployment rate can have an effect on the investment markets since it basically measures the strength of a nation’s workforce and underlying economy. If the unemployment figures continually increase, that can directly effect the perception of a possible weakening economy. On the other hand, decreasing unemployment figures or percentages can positively effect the perception of an economy’s overall health.

How is the unemployment figure calculated?

The unemployment figure is calculated through the use of the household survey, which is one part of the overall Labor Report. The household survey interviews about 60,000 households throughout the country to determine the number of people out of work. Then, you divide that number by the number of employed people throughout the nation, which results in the unemployment rate.

Lagging, counter cyclic indicator
This unemployment figure is considered a lagging indicator, which means that changes occur after economic changes. If the economy were gaining strength, that strength would only show up a few months later in overall unemployment figures. If the economy were weakening, then that weakness would only be reflected in unemployment figures a few months down the line. The unemployment figure is also considered a counter cyclic indicator, which means that it moves in the opposite direction of the economy. If the economy were strong, the unemployment figures would decrease, while if the economy were weak, the unemployment figures would increase.

Inherent weaknesses with the unemployment figure
Even though unemployment figures are highly celebrated statistics, which can affect investment markets on a whole, it does have inherent flaws. First, the unemployment figure is based upon a small sample size of only 60,000 households nationwide. That’s a drop in the bucket compared to the number of total households in this country. On the other hand, surveys don’t necessarily have to include everyone in the process to be meaningful. Second, the survey excludes a certain portion of the population – volunteers and those people who are not actively looking for unemployment for one reason or another. Even so, the unemployment rate is still a valuable economic indicator that’s utilized in investment decisions.

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Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.




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