Category Archives: Unemployment

Population versus U-6 Unemployment

Below is a graph of U.S. population compared to U-6 unemployment on a year-over year-basis.

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Unemployment Rate: Forecast

On July 26, 2013, we said the following:

“…the best we could expect for the unemployment rate, on the downside, is for 6.9%.  It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a ‘recession’ and the 3.8% unemployment rate at the height of a overextend economic boom.”

After falling below 3.80% in December 2019, the unemployment rate skyrocketed with the advent of the coronavirus (COVID).  We continue to maintain the view that unemployment above 10% or below 3.80% cannot be sustained for very long.

Below is our expectations for how the unemployment rate will change going forward. Continue reading

Unemployment Rate: July 2020

On April 11, 2014, in an attempt to project the direction of unemployment and the subsequent economic outcome, we said the following:

“Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.”

On August 24, 2018, we said the following:

“If the unemployment rate drops further then we would have stretched the capacity of the economy to its 48-year limits on the downside.  If the unemployment rate increases from the current level it would, as has been the case in the past, jump dramatically.”

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Since August 2018, the unemployment rate declined to 3.50% in December 2019.  The dramatic jump in the unemployment rate has followed immediately afterwards.

Up Next:  Unemployment Forecast

Unemployment Rate: March 2020

On August 23, 2009, in our call that the recession was over, we said the following:

“I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”

From the low in 2009 to 2014, many questioned the rising stock market and economy because job growth was not as strong as hoped.  However, it should have been understood that to achieve such accelerated job growth comes at a very expensive price.

On July 2013, we said the following of the unemployment rate:

“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”

On August 24, 2018, we said the following of the unemployment rate:

“Presently, we anticipate the unemployment rate rising to the 6.30% level as a natural reaction to the current low levels. While the unemployment rate can go lower, there is a tremendous tradeoff to achieving lower levels.  It is quite possible we have seen the best of times with a declining unemployment.  Anything below the current levels will come at a tremendous cost in the next recession.”

The current environment bears out the concerns that we’ve had about the unemployment rate decreasing below 3.80%.  Once we get beyond a certain tipping point the reaction is swift and unnecessarily painful.

The Outlook

According to the Washington Post dated March 23, 2020, the projected unemployment rate is likely to range from 9% to 30% based on the fallout from the coronavirus (COVID-19).  Our August 2018 projection of 6.30% remains, as it is the first stopping point to any higher level beyond Goldman Sach’s 9% or St. Louis Federal Reserve President James Bullard’s 30%.

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These estimates, in our view, are knee jerk reactions in a vacuum.  As we were concerned about going below 3.80% in the unemployment rate back in 2013, we’re going to wait until we reach 6.30% before we can offer up a measure perspective on the situation.

Please keep in mind that none of what has occurred, at least from a data standpoint, is unusual or unexpected.  Of course we couldn’t predict that a pandemic was coming.  Yet, the data, from a historical standpoint, suggested that the low range was at an extreme and was bound to react to the upside.

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Dow’s Theory on Employment and Unemployment

In the Review and Outlook section of the Wall Street Journal dated February 27, 1902, Charles H. Dow said the following of labor and unemployment and their impact on prices:

“Periods of depression in business and in prices are invariably preceded by periods of good business and advance in prices. At such times, which usually last for several years, there is a gradual increase in the employment of labor until at the high point abundance of work, large production, large profits and high prices go together.

“It is equally certain that periods of depression begin with over trading, over production, over confidence and general excess in all directions. Upon this condition of affairs comes some sudden shock. It may be an important failure; it may be some great catastrophe or national event; it is something which arrests attention and makes people stop and think.

“They see that they are extended, and begin to restrict operations in whatever line of business they may be in. Lenders of money restrict credits, merchants restrict purchases, creditors urge payments, and, as a result of this shrinkage, the demand for labor lessens a little in each case, but enough to make a large aggregate. This begins to be felt in reduced consumption, and this is the first turn of the wheel which brings about general contraction.

“It is evident, therefore, that the bearing of the employment of labor upon prices of securities is only that restricted employment is one of a number of causes operating to produce smaller profits; hence lower prices.

As showing how closely the demand for labor follows the lines of expansion and contraction, which find their ultimate expression in the prices of securities (Sether, Laura. Dow Theory Unplugged: Charles Dows Original Editorials & Their Relevance Today. W & A Publishing, 2009. page 83.).”

The distinction of Dow’s theory on unemployment and labor is that it is based on a rationale of the active participants in the economy which reverberates throughout the economy generating cycles.

Stock prices follow the prospects affecting unemployment and not the reverse.  However, the full scale reporting of unemployment data by government agencies lags that of stock prices.  This causes a feedback loop in the period when the primary trend of the economy is at a reversal stage.  The magnitude of declines in employment seem large in relation to the prior increase especially relative to the speed with which they occur as highlighted by Dow in the following August 8, 1901 commentary:

“If the general theory of swings is correct in the assumption that the top of the 'boom' has been seen, declines will average larger than rallies for some time to come (Sether, Laura. Dow Theory Unplugged: Charles Dows Original Editorials & Their Relevance Today. W & A Publishing, 2009. page 334.)”

The question of when and if a reversal is due is an important question as Dow makes clear in the following commentary on July 26, 1899:

“Reports from all directions are that business is active, labor is well employed and business men are making money. Such a condition has already brought about high prices in every department of trade.

"The question is now whether Wall Street has discounted this condition in full, or has it still more to discount? (Sether, Laura. Dow Theory Unplugged: Charles Dows Original Editorials & Their Relevance Today. W & A Publishing, 2009. page 67.)"

Consideration of Dow’s Theory has been the basis of our previous work on the unemployment rate which bears reviewing.

Stage 1: Recognizing the Change

On August 21, 2009, we said the following:

“Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI [Industrial Production Index] turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners.”

Throughout the period from August 21, 2009 to the present, economists and analysts have questioned the legitimacy of the growth of the U.S. economy and based their opinion primarily on the rate of growth as an indication of the weakness or sustainability of the rising trend.  Below is an excerpt from the Congressional Budget Office dated November 24, 2012:

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Also a part of our August 21, 2009 commentary we said:

“Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market. I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”

Not surprisingly, many news outlets seized on the idea that anemic job growth was a reflection of poor policy action as highlighted in the following Washington Post article dated October 23 ,2012.

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The first thing that stands out about Charles H. Dow’s commentary of employment and unemployment is that there is no reference to government intervention as the source of recovery (or contraction).  Instead, active participants with skin in the game are the ones who, based on the level of prices, decide when to commit to hiring and firing.

The second observation is that even if we were lucky in our call that the National Bureau of Economic Research would say that the recession ended in June 2009 (the September 2010 announcement here), Dow’s Theory points to why we would say that the recovery would be “lackluster”, “questioned”, and that jobs wouldn’t be as plentiful in the past. Dow referenced the “gradual” increase for a boom and the “sudden” nature of busts.

With this in mind, it bears noting that if a recovery is actually in place (at the time), it will be slow and that if it is slow it will take a lot of time for the realization and acceptance of the change in conditions which highlights the importance of the famous quote by Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one (Goodreads. Charles Mackay; quotes. accessed April 11, 2019. link.).”

Stage 2: After the Turn, Assessing the Conditions

On July 26, 2013, we said the following:

“Applying Dow Theory’s 50% principle suggests that the best we could expect for the unemployment rate, on the downside, is for 6.9%.  It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextend economic boom.”

Many economists critical of the presences of an economic recovery would often say something like, “…there is no recovery, just look at the unemployment rate, it is nowhere near the prior low of 4%…”  Again, the push for the belief that the recovery is finally in place once it achieves the prior low levels ignores the process and change in the economy that is necessary as outlined by Dow. 

Other critics are concerned that the reported data on the declining unemployment rate doesn’t reflect “…all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force."  This set of unemployment data is commonly known as the U-6 rate which is contrasted by the more widely quoted data set of the U-3 rate.  What’s the difference?

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The chart above shows the U-6 rate (Total unemployed, plus all marginally attached workers plus total employed part time for economic reason) in blue and the U-3 rate (Civilian Unemployment Rate) in red from 1994 to January 2018.  What should stand out is that there is a huge divide between the U-6 rate and the U-3 rate. 

What some commentators get wrong when they look at these numbers is the absolute levels, which should never be done.  Below, we have generated the appropriate way to determine how to look at the data from these two data sets when making a comparison.

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The chart above shows the annual Year-over-Year Percentage Change in the U-6 rate, U-3 rate and U.S. population since 1995.  Using this method of comparison, a reviewer of the data can draw meaningful conclusions that are accurate (minus the absences of population data from 2015 to 2019).

By all accounts, U-6 and U-3 rates have improved at the same rate since the 2009 peak, with the U-6 data showing a marginally better rate of change than the U-3 rate, all this while the population of the U.S. has increased slightly more than 0.75% per year.

Critics of the use of U-3 data, when asked to look at the data from this perspective, often become defensive and attempt to revert to the “U-6 rate is better than the U-3 rate” argument.  Unfortunately, the data as represented in the Year-over-Year Percentage Change is more definitive and appropriate when attempting to determine what has changed in the data since 2009.

Stage 3: The Primary Movement Revealed

In attempting to assess markets, Charles H. Dow’s April 27, 1899 commentary in the Wall Street Journal can be applied to any market where “price” is updated on a regular basis:

"The point of importance for those who deal in industrial stocks is whether the capitalization of the companies into which they propose to buy is moderate or excessive, when compared with the aggregate earnings of the various concerns forming the combination in a period of depression. It is probable that consolidated companies will be able to earn as much in the next period of low prices as the companies forming the combine were able to earn in the last one; hence the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowances for economies under consolidation. Where the earnings so shown would have provided dividends for industrials now active, the fact must be regarded as a very strong point in favor of those stocks (George W. Bishop Jr., Charles H. Dow: Economist, Dow-Jones & Company,Princeton, 1967, page 11.)"

As we pointed out in July 2013, based on Dow’s claim, the 3.8% unemployment was the “period of depression” by which we measured the extent that the market could go before being over-extended.  The last period that was lower than the 3.8% low was May 1969.  We cannot account for this prospect at least until the 3.8% level is achieved.  However, why would we even considered the 3.8% level when the previous low in unemployment was May 2007 at 4.4%?

In Dow’s reference to primary movements, he says the following in the Wall Street Journal on July 20, 1901:

“It is impossible to tell in advance the length of any primary movement, but the further it goes, the greater the reaction when it comes, hence the more certainty of being able to trade successfully on that reaction.”

From the May 2007 low in unemployment at 4.4%, the unemployment rate increased to as high as 10% by October 2009, which had not seen similar levels since June 1983.  Dow’s perspective suggests that the reaction (decline) should be as dramatic as the preceding extreme.  In this case, the last low after a 10% unemployment rate was the low of April 2000 at 3.8%.

The primary trend of any market is not revealed until many years have passed.  This is unfortunate because by default it eliminates from the collective memory of the market those who were lucky enough to correctly assess (guess) the conditions, either in general or precisely.

Is Unemployment Really Low?

There are many concerns of whether the unemployment rate is actually as low as it is claimed to be.  Again, as previously mentioned, there is a distinct difference between the U-6 and U-3 data on unemployment.

Without debate, the U-6 data has declined equally as much as the U-3 data from 2010 to 2019.  However, there is the segment of the population which, by no fault of their own, cannot be participants in the labor market.  As Described by Charles H. Dow in a December 11, 1901:

“One of the surest marks of the coming of bad times is the falling off in the employment of labor. As labor does not voluntarily deprive itself of employment, the cause of lack of employment must be found in inability to borrow money on favorable terms by those who depend on borrowed money to carry on lines of business in which labor is employed.”

The claim that “…labor does not voluntarily deprive itself of employment…” is reflected in a majority of the nonparticipation rate as outlined by the Brookings Institution’s paper on the topic, saying:

“After excluding caregivers (approximately 40 percent of nonparticipants), men and women report the same reasons—and at similar rates—for not participating in the labor force. Almost 30 percent of nonparticipants report being ill or disabled, while 8 percent are students, and 5 percent are early retirees (Diane Whitmore Schanzenbach, Lauren Bauer, Ryan Nunn, and Megan Mumford. “Who is Out of the Labor Force?”. August 17, 2017. link. accessed April 29, 2019.)”

A contrasting argument to the unemployment data being exceptionally low is that it isn’t as good as it is made out to be due to voluntarily leaving the marketplace for jobs. Some have cited the fact that since 2000, the labor participation rate, as reflected by employment relative to working age population, has been in considerable decline with a dramatic distance between the prior peak and the current level (Sherman, Erik. “Sure, Unemployment Went Down - Because More People Left The Workforce”. Forbes. May 5, 2018. accessed April 29, 2019. link.)

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As indicated in the data above from the Brookings Institution, 30% of non-participants in the workforces were due to illness or disability while another 40% were caregivers.  This confirms Dow’s claim that few are out of the workforce on a voluntary basis.  Additionally, that small minority of individuals who voluntarily take themselves out of the work force (not related to health issues) are generally in a supportive environment that allows for such changes in their life.

Where does the work of Charles H. Dow leave us on the topic of employment and unemployment?  In spite of technological  changes and the dramatic shift from labor intensive and industrial jobs to service related industries over the last 120 years, the expectations from employers and employees remain the same.  Being able to recognize these inherent needs allows for a reasonable model for what to expect when attempting to forecast the trend of employment and unemployment.

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Unemployment Rate: August 2018

On April 6, 2018, we said the following:

“As we approach the 3.80% level, it should go without saying that all the signs are in place for an overextended economic boom.”

Just look at the data, the last time the unemployment rate was below 3.80% was way back in 1969.

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From where we stand, it appears that the direction for the economy is to one extreme or the other.  No longer do we think there will be the gradual sloping (gradual relative to what is coming) to the upside in GDP, stock market and real estate prices. Either a bubble phase or a bust phase.

Unlike the many critics of the stock market and economy who are always saying that we are in a bubble simply because the trend is up,  we have clearly outlined the parameters of what a bubble is within the context of the market conditions.  What has been experienced in the economy and the stock market from 2009 to the present has been a normal reaction to the crushing decline from December 2007 to March 2009.

Continue reading

Unemployment Rate: April 2018

In April 3, 2017, we said the following:

“All that is left is for the unemployment rate to fall to 4.40% and 3.80%.  What is the constant challenge to any rising or declining trend?  Getting old and tired.  The manifestation of the declining trend getting old and tired is best represented in the percentage rate of change over the previous year.  When the trend starts on the path of a decelerated rate, you have a fair idea of what is coming.”

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So far, the unemployment rate has declined to 4.10%, an average of the 3.80% and 4.40% that was anticipated last year.  It is no monumental feat to suggest that the unemployment rate could decline from the level of 4.80% to 4.40% in 2017.  However, is something else to suggest that the unemployment rate could get down to 3.80% when it was hovering around 7.50% on July 26, 2013.

Our unvarnished assessment of the unemployment rate in July 2013 was as follows:

“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”

As we approach the 3.80% level, it should go without saying that all the signs are in place for an overextended economic boom.  Eight years of economic recovery without a recession indicates that a recession is due.  Below, we attempt to estimate the timing of the next recession based on our April 3, 2017 unemployment review.

Unemployment Rate: A Critical Juncture

On April 11, 2014, when the unemployment rate was pegged at 6.70%, we said the following:

Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.

At the time, we had projected that the unemployment rate would fall to at least 5.90%.  Based on the reported data, we are indicated to be as low as 4.70%.

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Continue reading

Our Call on the 7-Year Recovery

On August 21, 2009, we said the following:

“Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners.

“Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market. I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”

Below is the September 20, 2010 announcement from the National Bureau of Economic Research that the recession had officially ended in June 2009:

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In addition, the jobs data has been lackluster as is par for the course but was anticipated in our August 2009 review.

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Many claim that the employment data is rigged to reflect favorably for whichever politician that is in power at the time, so we have included the U-6 TOTAL unemployment data to verify if the economic environment really did turn around at or near the same period in time.

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From all appearances, the turn in the economy did arrive at the time that we thought that it should.  There are critics who say that the U-6 TOTAL unemployment data isn’t as low as it was at the 2007 period and therefore we aren’t in a recovery.  However, to achieve a low in the U-6 TOTAL unemployment you would need the clearly obvious bubble economy that we experienced at the peak of 2007.  Anyone who wants the same U-6 TOTAL unemployment as the 2007 period also wants the subsequent bust that is required of such a period.

We haven’t had as much luck calling a top in the economy as we had in calling the bottom.  On two occasions we had Dow Theory bear market indications which turned out to be false and in one instance, we’ve had the Industrial Production Index in decline.  However, we haven’t had both occur at the same time allowing us to make the call that the economy was entering a recession.

What are the odds that such a coincidence (saying that the recession was over a year before the NBER, that no one would believe it, that unemployment would be lackluster and that a bull market was in effect) could occur?  Got lucky is all we can say.

Unemployment Rate: Our Downside Target Has Been Met

There aren’t many who are convinced that the recession ended in June 2009 and that the jobs numbers are real, as opposed to contrived.  Most investors believe that the economy is still in a recession, which has been masked by Federal Reserve stimulus and that positive jobs data is strictly a ploy by politicians to hold on to whatever perceived powers that they have.

Our take on these topics is most accurately reflected in several articles that we wrote in real time with unflinching candor and little care for conspiracy theories.  On the matter of Federal Reserve stimulus being the reason the stock market rose, we have said the following:

“…those that claim ‘this time is different’ aren’t trying hard enough to prove their claim false. A cursory review of market data during the periods from 1860 to 1914 makes it clear that declines of nearly -50% or more are likely to retrace +66% to +100% of prior declines. This pattern has been easily demonstrated in the periods after 1914. However, we’re only trying to illustrate that the acceptance of the Federal Reserve’s role as the leading cause of the current +69% retracement of the prior decline (2007-2009) is false (January 19, 2011).”

The above point was reiterated in our more detailed revision to the same article on February 17, 2014. On the topic of the recession and its end, we have not minced words about the prospects.  Additionally, we have steered away from the belief that the economy, if in recovery, should exhibit a low unemployment rate similar that of the booming economy of 2006/2007, which was built on excess in many sectors.

On August 21, 2009 (found here), we said the following about the recession:

“Implicit in my discussion of the IPI is that we are at a turning point for the economy. Based on the combination of the Dow Theory confirmation of July 23, 2009 and the IPI turning up from the June low, I will have to guess that the National Bureau of Economic Research (NBER) is going to proclaim June 2009 as the official end to the recession. The end to this recession will be lackluster and questioned from all corners. Additionally, the stock market will only follow the pattern of a cyclical bull market (bear market rally) within a secular (long term) bear market.

I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past. However, from the standpoint of an economist the recession is over provided the IPI June low is sustained over an extended period of time.”

We were 13 months ahead of the National Bureau of Economic Research (NBER) on our call that June 2009 would be considered the end of the recession, based on what the NBER looks at (NBER announces end to recession on September 20, 2010).

What is the connection between calling an end to the recession in real time and our work on the topic of the unemployment rate?  First, we are using data reported by the government that is frequently revised.  Second, we apply Dow Theory to arrive at what we believe to be reasonable estimates of future trends.  Do we always fall for our voodoo economics?  We hope not, however, Robert Rhea’s book Dow Theory Applied to Business and Banking suggests that Dow Theory has a broader application than simply stock indexes.

On July 26, 3013 (found here), we said the following of the Unemployment rate:

“According to Dow Theory, expectations of how low unemployment should go are far more reasonable without the requirement of a economic boom that is followed by a bust.  According to the chart of unemployment below, the most realistic scenario for how low the unemployment rate could go is 6.9%.

“Applying Dow Theory’s 50% principle suggests that the best we could expect for the unemployment rate, on the downside, is for 6.9%.  It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios.  The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextend economic boom.”

What has transpired in the unemployment rate since our July 26th article?  Our downside target of a 6.9% unemployment rate has been achieved. Again, we understand the conspiracy talk of the numbers being made up for the purpose of some politician to rally for more votes come election time.  However, such arguments are a waste of time.   Our view is that we need a detached perspective in order to come up with reasonable estimates.

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So what do we make of the above chart?  In general, since all downside targets have been met, our next line of reasoning is basically a guess, at best.  However, we believe that our prior line of reasoning with a detached view might serve us well in what might come.

One item that stands out is the 2006 to 2007 low of 4.40% unemployment.  This was approximately 12% below the ascending Dow Theory downside target of 5.87%.  As the current level of unemployment is at or near the same ascending 5.87% level, we have looked at the point where the unemployment first touched the 5.87% line and then calculated 12% below that level as a worst case scenario.  Based on this line of reasoning, the next downside target should be 5.90%.

Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.

Dow Theory and the Unemployment Rate

For some, the economy has not fully recovered until the unemployment rate is “back where it was” when the economy was booming.  Unfortunately, there are key issues with this notion. Continue reading