Do Jobs Data Point to Deflationary Recovery?

The unemployment rate rose 3 percentage points to 9.7% in August. Both the bond and stock markets greeted the monthly employment report as indicating a recovery was near or had already started. Stocks advanced and Treasuries declined (interest rates rose). Both behaviors are expected in an expanding economy, especially in the early stages, as growth is anticipated and inflationary expectations start to rise.

Looking at the past month, however, the stock market and the bond market have been diverging. Since Aug. 6, both stocks and bonds are up. Advances have occurred for the S&P 500 (up 1.9%) and the Nasdaq Composite (up 2.6%). Over the same period, Treasuries have risen in value, and the yield on the 10-year Treasury has fallen from 3.89% to 3.45%. That is a 44-basis-point decline, or 11%. Falling interest rates (rising bond prices) are consistent with deflationary expectations.

Which market has the correct picture? Let's dig into the employment data for an answer. The following table shows the data used in unemployment rate calculations, comparing July and August data.

Data Used in Calculating Unemployment Rate

The following table shows additional data, including the nonfarm payrolls report, which provides the jobs gained or lost, one of the headline numbers found in every daily newspaper. Nonfarm payrolls indicated that 216,000 jobs were lost in August.

Other Employment Data

Note: The U-7 and U-9 unemployment rates are calculated based on a 40-hour week constituting full employment. If someone works a 30 hour week, that counts as 0.75 persons employed (unless they chose to work the shorter hours). U-7 corresponds to U-3, and U-9 corresponds to U-6. Those working part-time by choice are each counted as one full employee regardless of the hours worked.