Growth Begets Jobs, Not the Other Way Around

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Last week's unemployment rate drop gave the economy's bulls and bears alike something to cheer. The bulls pointed to the drop as a clear sign of broad employment improvement. The bears pointed to it as a sign of the still-all-too-high unemployment rate that could tip us into the next recession. But neither analysis is really right.

Why? First, the official unemployment rate is arrived at through a bit of a wonky calculation. It isn't just the number of Americans without work (defined by surveys of U.S. households) divided by the total workforce. It's actually the number of out-of-work folks who "actively sought jobs" (based on a survey), divided by the estimated workforce. Folks actively seeking jobs fell by 549,000 in November -- but that doesn't mean they all found new jobs. Rather, about half found jobs, and the other half gave up looking -- thus neither camp was "actively" seeking a job. So yes, unemployment fell and total employment rose, but the official unemployment rate doesn't perfectly reflect that.


What's more, though the rate fell a healthy chunk, at 8.6%, it's still fairly high. Vindication for the employment bears, who think this presages a return to recession? Not quite. As far back as we can measure, a high or rising unemployment rate hasn't been a reliable indicator of future recession. Quite the reverse! Fisher Investments research shows the official unemployment rate reliably peaks after every recession, then stays high for a prolonged period.

There are several factors contributing to the delay in hiring, but one key reason is businesses typically (and rationally) wait to hire until sales have recovered for some time and they've maxed out productivity gains earned in the economic downturn. In other words, economic growth begets employment, not the other way around.

So if economic growth brings jobs, how long must we wait to see the unemployment rate drop nearer its long-term average of below 6%? Exhibit 1 plots the headline unemployment rate and the average unemployment over time.

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