“Real” vs. “Nominal”

I was reading the employment report this morning (http://www.bls.gov/news.release/pdf/empsit.pdf). Go to page 19, and look at U-6.

When we read articles with headlines such as, “everything is fine” and “unemployment is only at 7.2%, it was 25% during the great Depression”, we are being grossly manipulated. In reality, the former statement is comparing two different types of data. 1930s employment data includes additives such as “marginally attached workers”; 2008 media reported data does not. Luckily, by reading the labor report, we can see the actual total unemployment number – which does include marginally attached workers (U-6).

In effect, U-6 is the “non-adjusted” number, and best matches unemployment as reported in the 1930s. Also, remember that employment data is a lagging indicator; it seems fairly obvious that we will hit a nominal rate of at least 9-10%. As you can see, the current level of unemployment, under U-6, is 13.5%. If we estimate a 30-50% increase in unemployment (from U-3 level 7% to 9.5%), then the U-6 level would approach 20%…

Just a little perspective. Over the past few months, I’ve tried more and more to think like a contrarian, always trying to invert and think in “real” as opposed to “nominal” terms. Specifically, we should try and read reports and information unfiltered by self-serving media outlets etc.; this is the only way to gain pragmatic perspective on the economy, finance, and most importantly, investing.

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~ by eboro on January 10, 2009.

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