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The U.S. Unemployment Rate: Is The Bottom Near?

Mark Shore profile picture
Mark Shore


  • The unemployment rate is a mean reverting indicator offering moments of oversold and overbought conditions.
  • The variance between the maximum and minimum rates of a given year, may indicate the stability of the unemployment rate.
  • Understanding the tendencies of the U-3 rate, may offer some clues toward the future direction of the labor market.

In recent months, a growing debate has appeared asking if the U.S. unemployment rate (U-3, the official unemployment rate) is indicating the economy has reached or nearing full employment.

"Full unemployment" is often defined as "the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage." (Source)

Full employment should not be confused with zero unemployment. At any given time there is usually some percentage of labor participants who are unemployed for various reasons. Hence, full employment is not a zero rate of unemployment, but full employment is considered a natural rate of unemployment which may change over time.

This analysis examined only the behavior of the monthly U-3 data from Jan 1948 to April 2017. A little over 68 years of monthly data.

Yes, there are multiple factors that may influence the direction of the U-3 unemployment rate such as interest rates, inflation, government policies, the labor force participation rate, mismatch of skills to demand, structural changes in the labor market and other macro-economic themes.

However, this analysis is not examining the factors that may influence the U-3 rate, but simply examining the behavior and tendencies of the rate since 1948.

Some may argue the U-6 rate (the widest BLS definition of an unemployment) is a better indicator on the status of unemployment, however U-3 is the headline rate (official rate) that is frequently discussed. Therefore, this analysis focused on the U-3 rate. The

Bureau of Labor Statistics (BLS) has six definitions of unemployment: U-1, U-2, U-3, U-4, U-5 and U-6.

The Unemployment Rate is Similar to a Spread

If you think of the unemployment rate as a labor market supply and demand gauge, consider it to be a mean reverting market that finds moments of overbought and oversold conditions. Think of

This article was written by

Mark Shore profile picture
Mark Shore is the Executive Director of the Arditti Center for Risk Management and a Clinical Professor of Finance at DePaul University. He teaches courses on risk management and alternative investments. Mr. Shore has more than 30 years of investment, research, portfolio management, and futures experience. He consults in alternative investments regarding due diligence, research, educational workshops, business development, and expert witness research. Prior positions include Director of Coquest Institute at Coquest Advisors, Chief Research Officer of Shore Capital Research and Head of Risk for Octane Research Inc ($1.1 billion AUM) in NYC from 2007 to 2008, where he was responsible for quantitative risk management analysis and due diligence of Fund of Funds. He chaired the Risk Management Committee and was a voting member of the Investment Committee. Prior to joining Octane, he was at VK Capital Inc ($300 million AUM) from 1997 to 2006, a wholly owned Commodity Trading Advisor subsidiary of Morgan Stanley. As Chief Operating Officer, Mr. Shore provided research and risk management expertise on portfolio issues, product development, and business strategy. Before becoming Chief Operating Officer, he was a Senior Research Analyst at VK Capital where he developed systematic trading models and a due diligence platform to test trading strategies.

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Comments (5)

Mark Shore profile picture
Thank you for all of the great comments!!
Great analysis -- excellent observation(s)! Congrats Mark!

Another key question (IMHO) is wages. These calls become much more dynamic and unpredictable with income swings. Real wages (especially of skilled and unskilled workers) arguably have not changed significantly in 40 years. I do not think it will be prudent to continue studying employment numbers in a vacuum much longer and predict that impending changes in wages will impact our thinking.

For example, as retail continues to implode and Amazon et al continue to grow, what happens to Walmart? Can the largest employer in the U.S. keep its workforce at the same cost if e-commerce growth continues to grab unskilled workers? Without differentiation, it becomes logical that wages will be forced to change. I also see incremental but steady movement in unions. Lastly how do you make "America Great Again" with low wages? If these jobs are going to return to the U.S. -- they will not be at the same pay -- so I see dominoes there too. Bottom line - if we reach maximum employment -- but the economy continues to grow.... changes in wages must come next --

Ken Brown
Jason Cawley profile picture
Lionchase - wages are rising, they have been increasing 2.5% a year for the past 2 1/2 years, since headline unemployment rate passed 6% headed down. Personal income is rising 4.5 to 5% a year.

Walmart's sales are up, including its same store sales. It isn't losing share. Online shopping with in store pick up is certainly growing, and pure online selling is reducing share of department stores and books stores and such, but not retail sales generally. Americans both still love to shop and the eat out, and also expect a full service panel of retail establishments in every suburban area.
Zeldan profile picture
"Full employment should not be confused with zero employment."

Nope. No confusion there.
Jason Cawley profile picture
You are correct that the unemployment rate bottoming is a leading indicator of recession, and that measuring its rate of change or volatility is a fine way of spotting its reversals. I find in my own cycle modeling that the Treasury yield curve, defined as the spread between the rate on 10 year Treasuries and that on 2 year (or 3 month) Treasuries, is an even stronger recession predictor. It tends to go to zero about a year ahead of the actual onset of recession. When both indicators are saying the same thing - unemployment low and going sideways, yield curve flat or inverted - recession is pretty much certain within a year's time. Such models can be tweaked to a bit better by also including the rate of inflation, to account for the pattern seen in some of the recessions of the 1970s and early 1980s (the so called "stop go" and "stagflation" pattern).

Timing the actual economic cycle, knowing where we are in its natural "phase", is not actually all that hard, if one listens exclusively to the macroeconomic indicator evidence. People fail to see such things because they aren't disciplined enough to listen cold bloodedly to the data, without emotion or other considerations getting in the way.

The evidence right now is that we are indeed entering the late cycle phase, but not yet at the recession in the next year portion of it. Besides looking for the unemployment rate to head sideways, the other key thing to watch from here is the yield curve flattening, Its current level of plus 1% is actually right around its phase average and is not yet signaling slowdown ahead.
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