The big brains over at Hamilton Place Strategies have produced a new white paper that tries to project the unemployment rate on Election Day in November. Now, the U-3 rate has dropped rather sharply since August, to 8.5 percent from 9.1 percent. The shrinking labor force has played a huge role in the decline rather than fast job growth. Indeed, the HPS report tosses out this joke from one of its fans: “You ought to be modeling how many people need to leave the workforce, not how many jobs need to be created.”
So how is the labor force participation rate looking today?
At 64 percent, it is well below the peak of 67 percent during the dotcom bubble, and significantly below the steady state of 66 percent we saw during the 2000s. Given the Baby Boom retirement and other demographic shifts, CBO projections expected it to be declining – 65.3 percent at the beginning of 2012. We are now 1.3 percentage points below that demographic estimate, the equivalent of 3.2 million “missing” workers. If the “missing” people were in the labor force, the unemployment rate today would be 10.4 percent, not the current 8.5 percent.
That 10.4 percent figure is just a tick about the estimate produced by Nomura Economics in my previous blog post. If some of those discouraged workers start actively looking for work again as the economy slowly heals, they will again be counted by the Labor Department as officially unemployed. That creates a potential situation where the unemployment rate could rise even as the economy strengthens. But maybe they won’t come back, given a stagnating economy. Or maybe even more workers get discouraged. So the unemployment rate could fall even as the recovery stays anemic. Kind of confusing, I know. Here’s HPS:
Part of our modeling over the past year has been based on the number of workers projected to enter the labor force. CBO had estimated last spring that in 2011 and 2012, the labor force would expand by roughly 2.9 million workers. Instead, at the midpoint of that period, the labor force has expanded by less than 300,000.
We had assumed in our model that these workers might not all come into the labor force at once, but that in time those 2.9 million would eventually appear. As the job market has dragged on with incremental growth below what is needed to get people back to work, it has become less clear when the jobless will once again start to re-enter the labor force and look for work.
Given the possibility that the labor force participation rate remains depressed relative to projections, we have expanded our jobs/election modeling to accommodate different scenarios of labor force growth. Instead of assuming one path to the forecasted trend for labor force participation, we have calculated the unemployment rate on Election Day under a range of labor force participation paths back to full participation. We have examined four basic scenarios for the coming year.
Here are the four scenarios:
Scenario 1: Continued decline – The participation rate continues the gradual decline we have seen over the previous year, with little growth in the labor force.
Scenario 2: Stabilization – The participation rate stabilizes at the current rate of 64 percent. Labor force growth picks up to keep pace with population growth.
Scenario 3: Two-year return to trend – The participation rate rises back to trend over the coming two years as people reenter the labor force.
Scenario 4: One-year return to trend – The participation rate picks back up to trend over the next year as workers respond to stronger job growth.
And here is the unemployment rate projection under each scenario:
HPS sees continued decline in labor force participation rate (Scearnio 1), so it will take less job growth to reduce the official unemployment rate:
Our modeling projects that if the trends of the past year continue (131,000 jobs per month, decline to 63.6 percent labor force participation), the unemployment rate on Election Day will be 8.1 percent.
Bottom line: Is 8.1 percent good enough to get President Obama reelected? Well, it might be if higher economic growth were the reason the unemployment rate was dropping. Although more discouraged workers would become active—expanding the official labor force—there would be gobs of jobs for them. That is how it worked during the Reagan Recovery where the unemployment rate fell even as the labor force participation rate rose because the economy was creating nearly 300,000 jobs a month.
But this time around, the unemployment rate would be falling because the economy remains weak. Not many jobs would be created. That also means weak income growth, which is even more influential on presidential election results than the unemployment rate. If people don’t sense their own economic situation improving very much, it won’t matter what some distorted statistic from a government agency says about the economy. Or what Obama says, either.
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My guess is they won’t come back, but have found some “disability” lawyer to get them disability payments. Anyone know what the rate of growth of disability payments has been over the last five years or so?
OOps!…I meant to to say earlier that Obama’s was worst inherented unemployment rate in history since great Depression…it is also my belief that we would be in an other Great Depression if it wasn’t for ..social security, unemployment compensation and medicare, cycling thru our economy keeping our economy from being completely stagnate like in the last great depession
Who is John Galt? How does taking money from the productive private sector and feeding it into the parasitic government/entitlement machine generate wealth? How does it improve the functioning of our economy and society?
Socratic method – 1, kindergarten economics – 0.
@Ricky-D: You can choose to believe whatever you want, no matter how economically wrong it is. It might make you feel like a good person, but doesn’t make it true. If it just made you delusional I wouldn’t mind, but unfortunately when enough people choose to believe what makes them feel like a good liberal instead of what makes good economic sense, it hurts the rest of us and we don’t deserve to suffer just so you can feel good.
This guy is cherry-picking the U3 & U6 Unemployment formulas from Reagan to today. If you do his same comparison ..then when Obama first took office the unemployment rate was approximately about 12.6%. which makes this the worst in history ..contrary to Ann Coulters claim about Reagan recession being worse….but then again she already knew this and cherry- picked as well. Reagan Era formula– 12.6% down to 10.4% …now thats the true comparison.. and it just dropped again by another .02% yesterday Feb. 3rd, 2012. You all have to admit its heading in the right direction
How is 12.6% worse than the current U-6 of 15%?
Note also that the 12.6% spike occurred as a liberal Congress (Democrat and RINO alike) rushed back to Washington to blow many hundreds of billions of dollars. That is to say, what you can blame on Bush, you correctly blame on liberal action.
I disagree somewhat with the author’s conclusion that falling unemployment numbers would not be helpful for Obama.
1) The media will tout that story as proof of recovery, true or not.
2) Those swing voters who are not actually unemployed will buy it.
Here’s my summation (which hasn’t changed in months):
No matter how bad things get for Obama, his chances of re-election will never fall below 50%. Thanks the media, money, the bully pulpit and the advantages of the incumbency, plus his proven skill as a campaigner.
Any benefit, no matter how slight (or illusory, as the above article shows) will add to the 50% minimum.
The good news: With a strong opponent (and I can’t stand Mittens, but he is a sleazy, dirty, clever operator, just like Obama, though not ‘quite’ as bad), Obama can be beat.
The income component is another way of saying that increased employment in crappy jobs isn’t going to fool anyone.
Under Reagan, 20 million jobs were created, while under obama we have fewer jobs now than when he was elected, the worst record in our lifetime. the unemployment rate fell during reagan’s first term. This secanario shows that no matter what, there has been an increase in the unemployment rate, and this in spite of millions of labor force ‘drop outs’ along with the largest number of long-term unemployed.
Obama inhereited a crisis and managed over 4 years to add more to the debt than any other president in history while doing nothing to really fix the situation. What little growth we’ve had has ben in spite of him.
If voters want to give credit to Obama for increasing the unemployment rate, have the worst growth record in a generation, and adding $6 trillion to the debt that is one thing, but giving him 4 more years to harm and suppress our economy is another.
http://www.sodahead.com/united-states/question-when-was-unemployment-highest-in-the-us-since-the-end-of-the-great-depression/question-963023/?link=ibaf&q=&imgurl=http://images.sodahead.com/profiles/0/0/0/8/5/2/6/3/4/Unemployment-under-Reagan-and-Obama-11115671366.jpeg
“After 8 months of Reagan being in office, unemployment spikes reaching 10.8% in November and December of 1982. Unemployment doesn’t then reach 7.5% again for another 1.5 years (17 months)”
hmmm…Reagan
http://voices.washingtonpost.com/ezra-klein/2010/04/are_happy_times_here_again.html
When Reagan took office, the unemployement rate was 7.4%. It peaked at 10.8% in December of 1982. When he took office, the country was not in recession. The recession begain in July 1981 and ended November 1982. Unemployment was higher than today’s numbers during 1982-3. However, once the econmony started growing in December 1982, job growth was strong. By November 1984, the rate was 7.2%. About 5.3 Million jobs had been created.
In the fall of 1983, Democrats were eager to run against Reagan, whom they hated as much as Republicans hate Obama now. They looked at the bad unemployment numbers and thought he was very beatable. They were proven very wrong because conditions had improved greatly by November 1984. And, the labor participation rate (%) in 1984 was approximately what it is now. People forget how tough the economy got in 1982-3. If our current economy adds jobs at an average of 200,000/month until November, Obama is in very good shape. This is because, unlike Reagan, Obama inherited an economy that was in a free-fall recession, losing 800,000 jobs a month. The public is likely to take that into account, especially since the Republican counter argument is marred by the fact that the country entered the free-fall during Bush’s watch.
The only similarity is they both inherited bad economic situations. Reagan’s was worse because of runaway inflation. Reagan cut taxes and reduced regulation. Obama hung matching trillion dollar millstones around the neck of the economy in the form of Stimulus and Obamacare.
Obama fans can tout the similarities all day. Just don’t expect a Reagan-like recovery. It isn’t coming.
And, by the way, what was the labor participation rate in 1984, when Reagan ran for re-election after a very tough recession? Wasn’t the rate about what it is now? Reagan’s unemployment number during 1984 benefited from a low participation rate, too.
I agree that labor participation rates can effect the reported unemployment number. But it is really tough to imagine Obama losing to any of these candidates if the economy generates an average of even 200,000 new jobs per month until November. I would not predict a landslide, but the Reagan 1984 scenario of people giving credit to the guy who inherited the bad situation is very much in play.