Last week we talked about the recent not-so-good news on the U.S. economy and dove deep into why GDP is used as a metric and how it can be misleading. 

This week I’m going to share more about another metric that is getting a lot of attention these days: the unemployment rate. On Friday of last week unemployment data for the month of July was released and, although 1.8 million jobs were added during the month, the unemployment rate is still above 10%. 

But what does “unemployment” actually mean? 

Colloquially unemployment just means exactly that - someone without a job, but the Bureau of Labor Statistics calculates it a little differently. The U-3 unemployment rate (which is the most common statistical measurement of unemployment) includes folks who are: 

• Available to work

• Actively seeking work 

• Are furloughed 

It does not include folks who are: 

• Employed in part-time jobs, but who want to work more

• Underemployed

• Work 15+ hours a week of unpaid “family work” 

• No longer seeking work because they haven’t been able to find work for a long time (these people are considered “out of the labor market”)

It also, unfortunately relies on answers from folks who may end up misclassifying themselves. For example, a freelancer unable to find work during the COVID-19 pandemic might not say they are “unemployed” and therefore wouldn’t be counted in the rate. However, they likely should be as they are not bringing in income. 

There is a better indicator: the U-6 unemployment rate includes folks who are working part-time, but want to work full-time and folks who are “marginally attached to the labor force”. Being marginally attached includes people who have given up searching for a job.

So, while July’s U-3 unemployment rate was 10.2%, the U-6 rate was 16.5%. Not to be a negative Nancy, but I’m going to go ahead and say that the U-6 rate is much more accurate and is the metric we should actually be using when we’re talking about employment in the U.S. I mean, how are we supposed to successfully tackle the problem if we’re not even talking about the numbers accurately? 

I talk about being financially transparent with yourself all the time and, while I am usually talking about personal or small business finances, I think that same advice goes for the government as well. One of my favorite templates I use with clients (that you can get for free here!) is the Know Your Numbers spreadsheet. The purpose of the template is for you to be able to see all of your key metrics in one place:

• How much liquid (i.e. easily accessible) cash you have in checking and savings

• How much illiquid (i.e. would have to sell to access) savings you have

• How much debt you owe

• How much your assets are worth

• What your income is

• What your credit score is

All of this information is valuable because it can help you see where you financially stand now and recognize areas that you’d like to change. 

For example, when I look at my Know Your Numbers spreadsheet I feel proud of my lack of credit card debt and increasing savings, but know that I haven’t reached all of my savings or investing goals yet. Seeing that clearly helps me know what my next steps should be. On the other hand, if I have to open seven different tabs in order to get this information I’m likely going to be pretty confused and will not have an accurate read on my real numbers. I might end up thinking because I don’t have credit card debt that I don’t need to do anything else to improve my financial outlook. Or I might end up focusing in on just one account and miss the forest for the trees. Looking at the U-3 unemployment rate is very similar. It may look better than the U-6 rate, but it doesn’t tell the full story and therefore likely doesn’t point us in the right direction for how to make improvements. 

XOXO

On Thursday of last week the U.S. government released economic statistics from the second quarter of 2020 (April - June) and to put it mildly, they were terrible. The indicator they used, GDP, is often talked about, but rarely explained, so today’s post is all about what that indicator means, why it is used, what looking at it tells us about the recent state of the economy, and what it might show about the future. 

To start - just about every headline I saw about the economy on Thursday said something like “the worst ever” or “record low”. To be clear - GDP was not used as a metric until the mid-40s so we aren’t comparing our current economy to the Great Depression, just everything over the past 80 or so years. 

So, what is GDP anyway? GDP stands for Gross Domestic Product and is a measure of the total market value of all goods and services produced within a country’s borders. Note: GNP, or Gross National Product, is the same, but includes foreign investments. 

I think sometimes looking at the mathematical formula for GDP makes it a little clearer: 

GDP = C + G + I + NX

C = consumption (everything we bought)

G = government (all government spending)

I = investments (all stock market and other investments)

NX = net exports (value of all of our exports minus the values of all of our imports)

Basically, the more all of us spend, whether it is at a grocery store or an investment in venture capital, the better off GDP looks. The thinking behind using this as an economic indicator is that if folks are comfortable spending and are spending more than they used to then that means they have enough income and are feeling confident in the economy. While I think GDP is helpful, I don’t love this as a standalone indicator because it doesn’t take into account the overall picture of economic health -- it just shows overall spending. For example, over the past decade GDP has been growing and yet the wealth gap was also growing -- looking just at GDP makes things look good, but we know that the reality in many households is completely at odds with that. 

There are a lot of scary things about Thursday’s statistics from the Bureau of Economic Analysis, but the one that I find most worrisome is that the country experienced its worst quarter on record while at the same time the government (remember G! Government spending is one of the parts that make up GDP!) was pumping $2.2 trillion dollars into the US economy through the Cares Act. Now that most of that funding has either been used up or discontinued (think PPP and the additional $600/week in unemployment benefits) it seems like the third quarter (July - September) will look even worse, especially if the coronavirus continues to spread at the rate that it has been. 

But, because I am solidly a “glass half full” person, I can’t leave us on that depressing note. Instead, I’d like to end on a reminder: GDP is not an accurate metric for the economy as a whole. There have been institutionalized issues with our economic system for decades (think wealth inequality, unlivable minimum wage). GDP’s downfall makes all of that even more obvious (I know, I know, that’s even more depressing - hold on). 

As the economy slumps this is a perfect time to be able to rebuild in a way that is inclusive, focused on true equal opportunity and in harmony with long-term goals of environmental and economic protection for all. You may not be the one to decide to pump $2.2 trillion dollars into the economy, but you do make an impact towards this larger vision. You decide how to vote politically and you decide how to vote with your wallet -- you decide where to spend money, where to avoid, who to donate to and where to offer your resources and services. Things aren’t looking great, but I believe that we can use that outlook to make 2021 better. 

Next week I’ll be diving into a few other metrics that may be better (or worse!) ways of measuring our economic health. 

XOXO