The Dow Jones Industrial average sits just over 16,500 — quite a comeback over the last few years. In fact, just recently, the Dow Jones hit its highest mark yet in U.S. history. What is causing the market to rise to new highs? Is this conducive of an economy pulling itself out of a global recession? There is very little evidence to support this market surge. Lets take a closer look as to why our economy is not reflective of this market rally.
Historically, any significant jump in the Dow Jones would signal a strong and healthy economy
with all the opportunity in the world, meaning that there would be little, if any, layoffs and that unemployment would be at its lowest levels. Today, that is not the case. Common economic indicators, such as the unemployment rate, show sluggish results at best, while conveniently painting a picture of unrealistic momentum in the work force.
In order to understand the true numbers of the unemployment rate, it is imperative to understand what each number represents. The federal government uses workforce and non-workforce percentages of Americans over the age of 16. The workforce numbers represent those who recently had a job and are actively looking for another job, thus being eligible for unemployment benefits. The non-workforce population represents those who do not work, had a job, cannot find a job, and have been nonactive in job searching (unemployment benefits being expired). The number of non-workforce Americans in April of 2014 was 92 million. Conversely, the number of workforce Americans in the same month was 155.421 million. However, the federal government only uses the workforce numbers when calculating unemployment, excluding the non-workforce numbers from the formula.
See also: ‘Lump of labor’ nonsense
In April, those who are actively looking for a job represented 9.73 million of the workforce. Therefore, the “unemployment rate” in April was 6.3 percent. However, if you use the relevant non-workforce numbers, the unemployment rate is much higher, as those who have given up looking for a job still do not have one. Additionally, there are many not counted in the unemployment rate who continue to look for a job simply because they lost their benefits. The question is, why doesn't the unemployment rate factor those who can work but have given up?
In addition to the skewed numbers of unemployment, when you look at the salaries of those working, another unrealistic picture is being painted. Of the 155.421 million working Americans, approximately 40 percent are making poverty-level wages. Furthermore, over 20 percent of the workforce made more in 2006 than they did in 2013. These percentages of the labor force are not reflective of a market operating at its highest levels. Yet here we are, with the market rallying at its highest point. Indicators like the unemployment rate can show counterproductive numbers of growth because of the continuation of the federal stimulus. Regardless of how high the Dow Jones has jumped, the federal government still feels that $40 billion per month of treasury bond purchases is necessary to sustain today's unpredictable market. Granted, the federal government has dropped these monthly purchases from $85 billion per month to $40 billion, but still, the overall toll of the federal stimulus is over $4 trillion dollars since the market crash of 2008.
The federal stimulus keeps interest rates low, while keeping a tight leash on inflation. Without the federal stimulus, the Dow would not be where it is today. Because of these cash injections, factors like the unemployment rate often speak to the contrary of a rallying market. As we continue with the federal stimulus, our long-term debt continues to grow. The question is, how long can we sustain this high point in the market while adding an additional $480 billion to our national deficit
Until we answer that question, indicators such as the unemployment rate will continuously show data non-reflective of a healthy economy. Because of conflicting reports, many financial firms are predicting a sizable correction of up to 20 percent coming right around the corner. Bottom line, whichever way you choose to redirect your clients' retirement nest eggs, make sure you understand the unbiased numbers in order to help guide them in the right direction.