Does the unemployment number tell enough of the story?
The Federal Reserve seems to be fixated on the unemployment number as well as the inflation number of late. The statements from the fed all fall along the lines of we need higher unemployment to curb inflation. The implication is that low unemployment and people working is a bad thing. And, it likely does result in wage inflation as employers compete for employees. However, I don’t think this is a bad thing – except for employers, particularly ones that believe employees should basically work for free or, worse, pay employers to allow them to work there (that’s really a thing). A great organization has a more symbiotic relationship with its team than that. No, low unemployment is good. That means there are opportunities for people. Opportunities create a great society.
However, the unemployment rate doesn’t tell the entire story. The assumption is that work is binary. People go to work for a company. They get a paycheck. They are employed. When the paycheck stops, they are unemployed. There is, however, a huge sector of the economy, perhaps as much as 30% or more, that doesn’t fall within those definitions. These are your small business owners, your independent contractors and large swaths of certain industries. When the economy falters, these people often don’t become unemployed in a literal sense and definitely not in any way that shows up in government statistics.
They don’t have the option of filing unemployment claims. They don’t show up in the statistics. They may even still be working.
How is that bad, you ask?
They may still be working but they are working less and making less. So, they aren’t unemployed but income is down 20% or 30% or more. Often, there is no cushion to absorb a 20% decline in income. They sell 2 houses this year instead of 10 or complete 20 projects of a smaller size rather than the 25 from prior years.
But, these types of numbers don’t show up very well places. You can see macro numbers about real estate transactions or housing starts or permits but this independent economy is far more pervasive than those numbers provide.
So, while the fed is focused on the official unemployment numbers and making sure more people with formal jobs lose them, there is significant collateral damage in the non W2 job sector as people earn less as their sales decline. I see this first hand in the construction business. As this sector of the economy struggles, it will affect the economy on the whole.
By moving rates as fast as the fed has, they haven’t given enough time to assess the impact to the entire economy. Many indicators are lagging in nature but the indicator that isn’t measured very well, underemployment in general and in the independent sector in particular, is showing plenty of stress right now. The fed members need to get out of the office and into the economy and talk to people. Data is great but it only tells part of the story and where the economy is concerned, you need the entire story.