Should you expand your business?

Knowing when it and if it’s a good time to expand your business is a complicated question and fraught with unexpected and probably very exciting twists and turns… And if you’ve ever seen a horror movie, “exciting twists and turns” is often not a positive experience!

One of those decision criteria is likely the level of economic activity. Is the economy strong enough to expand my business? There are lots of ways to view the economy, but an easy measure is the unemployment rate. When you consider the level of economic activity based on unemployment, you need to keep in mind this statistic tends to lag behind the rest of the economy. That means, unemployment is going to go up quickly in the beginning of a downturn and it’s going to take longer to recover. Businesses tend to be timid when coming out of a recession and not quick to rehire for fear the improvements may not last.

The other difficulty with this number is you may have heard more than one unemployment rate quoted in the news.

During the Bush administration Democrats talked about alternative measures of unemployment. Those measures were much higher than the “official rate.” Republicans didn’t talk about it though.

During the Obama administration the Republicans talked about alternative measures of unemployment. Those measures were much higher than the “official rate.” Democrats haven’t talk about it though.

If you think this is the beginning of a really bad poem, it’s not.

The truth is the Bureau of Labor Statistics (BLS) is constantly measuring several types of unemployment. The one discussed most often is called U3. That’s the official unemployment rate. U3 includes those people in the labor force who have looked for a job in the last four weeks. The other measures U4 through U6 add different groups of people who do not have jobs or are only working part-time. U4 includes U3 plus those who have looked for a job in the past 12 months, but they gave up looking over the previous four weeks because they did not believe there were any jobs available. U5 is very similar but they could have given up their job search for any reason. Finally U6 includes U5 and those that are only working part-time, but would like a full-time job. Those definitions are simplified somewhat, but give the basic idea. If you want the complete definition you can always go to the BLS and find the exact definitions.

The question is which one should we pay attention to? Why is U3 the official rate? If you’re the party out of office U6 is going to give the best bang for your buck, but that’s purely a politically motivated point of view and politics serves to distort more than clarify, so that’s probably not the best approach, especially since once you take office, the number will magically revert to U3…

The answer is all the numbers are useful and all the numbers tell stories about what is happening in the economy. There’s not a right or a wrong number. None of them are more correct or give the true picture. Anyone who tries to convince you otherwise is probably trying to push an agenda. In fact, a paper written in November 2014 states all the measures move in the same direction anyway. And that brings us to the best view of the data. Regardless of which measure you use, it’s the trend that matters. If U1-U6 are going up, that’s a bad thing. If they’re going down, that’s a good thing. If they get too low, I know that sounds odd, that means the economy may be over-heating and you can expect inflation.

If you think about the higher alternative measures it can be argued that these other measures are less reliable. For example, if someone filled out one application 11 months ago and didn’t do anything since is very different from a person that’s been filling out two or three applications a week and finally gave up five weeks ago. In the former case, maybe that person was working just as hard until 11 months ago when they finally gave up. On the other hand they may just be lazy.

Have you ever known someone who had a part-time job or a job they didn’t like and they complained constantly? At first you may be concerned about their situation, but when you ask, “Have you looked for a new job?” When they say, “No.” it makes you wonder how much they really want a new job.

As mentioned, the other measures are reasonable views of the labor market, but they leave a lot more room for interpretation.

The absolute value of the number is not nearly as important as the direction that number is moving. Here’s an odd “what if” scenario. Let’s say today the BLS determined they had a systematic error in their measurement of the unemployment numbers. All the unemployment statistics are two percentage points lower than they really are and it’s been that way for the last 30 years. (You could say the numbers are higher if you want.) What difference would it make? Sure we would realize things are not as bad as we thought (or worse if you went with two percentage points higher) but would anything have been done differently? Probably not. The trend would have been the same, in 2007 the unemployment rate would have been going up, albeit less than we thought. The rate would have maxed out at 8.1% rather than 10.1%, but that’s still high. Maybe we would have done a little less as far as intervention, but there still would have been intervention.

As “what if” scenarios go, this was really extreme. Two percentage points is a huge error and it’s unthinkable this would ever happen. If the numbers were to be restated because of some error, it would certainly be much less than two points. I used such a high number just as an illustration.

With times series data, the absolute number is important, but the trend is the most important thing. This is just as true of satisfaction data as it is unemployment data. If your numbers are bad you might want to consider doing something about it. Of course if you’re an Austrian it doesn’t matter what the numbers are you’re not going to do anything anyway, which includes getting re-elected.