Why A Higher Unemployment Rate Is A Good Thing

higher unemployment rate

Is the U.S. economy strong enough to handle a higher unemployment rate?

Investors seem to think so…

This week, the Labor Department released its June employment report, noting an increase of 287,000 new nonfarm payrolls. This was the highest level of job creation since October of 2015.

higher unemployment rate with more hiring
(source: WSJ)

The strong growth in new jobs was a relief, especially considering the anemic level of job growth in May. Seemingly in contrast to the encouraging job creation, the Labor Department also reported a higher unemployment rate.

At the end of the month, an estimated 4.9% of workers could not find jobs. This is higher than the 4.7% unemployment rate from May. What gives??

Why a Higher Unemployment Rate May Not Be So Bad

There is one key thing to realize with unemployment statistics. The unemployment percentage is calculated by dividing the number of active job seekers by the total number of people in the labor force.

If workers become discouraged and are no longer actively looking for a job, they don’t get counted in the unemployment rate.

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This month, the higher unemployment rate is actually due to an expansion in the labor force. According to the Wall Street Journal, the labor force participation rate increased during the month of June.

That means more people became encouraged enough about the economy to once again begin looking for (and in many cases finding) work.

An additional piece of evidence pointing to a stronger labor market is the reported rise in wages. In June, employees received a pay bump of 2.6% over last year’s wages. This is good news for the economy, showing stronger demand for labor.

Wall Street Reacts To Higher Unemployment Rate

The jobs report helped to push stock prices higher Friday. The Dow rose more than 250 points, closing very close to an all-time high.

Traders are now viewing the economy as “not too hot, and not too cold.”

The weak May employment report, and the uncertainty following the Brexit vote will make it extremely difficult for the Fed to hike rates. That’s because higher rates might stifle what is viewed as a vulnerable economic recovery.

But at the same time, a strong jobs report in June helps investors make the case that the U.S. economy is still growing (however vulnerable that growth may be).

So with a growing economy, and an accommodative Fed, stocks are free to continue to move higher.

I’m still somewhat skeptical with today’s bull market. There are a number of issues that could cause stocks to trade lower in coming months. (We’ll talk about these over the next few days).

That’s why I continue to own a few puts on small cap stocks in my account. That way if the market takes a nose dive, I’ll make some profits from these puts to offset the pullback in other positions.

Meanwhile, the market has basically given us a green light to continue to cautiously collect income using dividend stocks, put-selling transactions, and our discount bond approach.

Next week, we’ll start reviewing earnings reports from some of our watch list stocks. These will give us a better view of the overall business climate following a very interesting second quarter.

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