Importance: ***
 
 Definition: The unemployment rate represents the fraction of the labor force that is unemployed. It is published monthly in the government's employment report covers also information on payroll jobs, employment, average workweek, average hourly earnings.  It increases or falls following a change in economy activity.
 
Related Indicators:  The employment report also covers information on payroll jobs, including
employment, average workweek and average hourly earnings.

Source: Department of Labor

Frequency: Monthly

Availability: One week following the reported month

Direction:  Counter-cyclical.

Timing: Lagging indictor as the unemployment rate peaks after the trough of the business and bottoms after the peak of the business cycle.

Volatility: Close to none

Likely Impact on Financial Markets:
 

Interest Rates: Larger-than-expected monthly fall in the unemployment rate  is considered inflationary causing  interest rates to rise. The bond market views an increase unemployment rate favorably especially when the economy is close to full capacity and the unemployment rate is close to its "natural rate". A falling unemployment rate also make it more likely that the Fed will increase the Fed Funds rate that is also bearish for the bond market.

Stock Prices:  Ambiguous. First, lower unemployment rate signals a strong economy, higher potential profits and that's good for the stock market. Second, lower unemployment may increase expected inflation and lead to higher interest rates that are bad for the stock market. Third,  lower unemployment rate may lead to higher wage inflation that is bearish for the stock market. The first effect dominates in recessions and early stages of economic recovery while the second and third dominate when the economy is close to full capacity and the unemployment rate is low

Exchange Rates: Lower than expected unemployment rate will tend to appreciate the exchange rate as it is expected to lead to higher interest rates.
 

Analysis of the Indicator:
During the 1996-1997 period, the unemployment rate has gradually declined and recently been running at levels below what economists believe to be the "natural rate" or NARU (the non-accelerating rate of inflation unememployment rate), that rate at which sustained unemployment can exist without leading to higher wage and price inflation.  Unemployment rates below the natural rate (and economic growth above the 'natural' growth rate) cannot be sustained for too long: they would eventually cause higher inflation and lead the Federal Reserve to increase the Fed Funds rate in order to slow growth and prevent a pickup in inflation. Traditionally, the "natural rate" has been estimated to be at 5.5%. As the unmployment rate has been below 5% since the beginnning of 1997, some investors and economists believe that the natural rate might be now lower than 5% because of structural changes in labor market and the economy (the so-called "new economy"); other are instead concerned that we are now below the NAIRU and that  wage and price  inflation is bound to increase. See the home pages on NAIRU and productivity growth controversies for more on this debate.

WEB Links

A Graph of the latest Unemployment Rate data from The Economic Statistics Briefing Room of the White House .

The latest Unemployment Rate report from BLS.

See the Dismal Scientist Homepage for charts, tables and analysis of the unemployment rate in the latest employment report.