While You're Watching the Fed, I'm Eyeing the U-6

When we hear the U.S. government's latest reading on “unemployment,” the rate we normally hear quoted is what's called the “U-3,” which cuts out the underemployed, marginally employed and those who have given up looking for work.  

The U-3 snapshot misses what might be called “friction” in the workforce and much of the time, workers in those other categories number as much or more as the U-3 group. That’s why I usually look quickly at that headline indicator and go right to U-6 unemployment.  

U-6 includes those additional classes of the unemployed not counted in U-3. During the 2008 Global Financial Crisis and its aftermath, that was the figure that needed to come down to get the stock market back in the green and at the time it was stuck in the high teens for an uncomfortably long time. Lately, it's been more tame.

How tame? The latest U-6 reading was 7.1%, versus the 4.0% U-3 figure, and the long-term U-6 average of just above 10%. All’s well, right? Maybe.

There's a subtle trend in the data that some of us are watching carefully, as the “canary in a coal mine” for the Fed and the markets.

U-6 Unemployment is Rising, Slowly but Surely

U-6 unemployment has started to rise for the first time since late 2021. The May reading was up from 6.9% the prior month. And while U-6 did hit 8.0% briefly in January of this year, it is up from a low for this cycle of 6.3%. So, there’s some “lift” going on here, and it is worth watching in future months.

This might be one reason why many polls of U.S. consumers show that they aren't happy about the economy. Inflation is an easy target, and not everyone owns the SPDR S&P 500 Trust ETF (SPY), which has been carried higher the last couple of years by a small number of superhero stocks. So, some folks feel the pinch of inflation, and don’t have a rising home price or stock portfolio to make them feel better about offsetting that inflation. But at least their job is steady, right?

The Gig Economy is Hot. Will it Become a Necessity?

That depends in large part on U-6. The post-pandemic attitude toward work has been somewhere between different and downright weird, with the work from home prompting some to decide they will only work from home, or otherwise place a higher bar on a job they will accept than in the past. 

Then there’s the “gig economy,” which many in the publishing industry are part of. Some simply work multiple part-time roles out of convenience and preference, but for others, U-6 could be hinting at it being tougher to get the right kind of work. “Underemployment” was a huge issue following the 2008 economic debacle.

It remains to be seen where this goes. But we can be confident that this week’s FOMC roundtable will include this and other alternative forms of unemployment as they try to achieve their “dual mandate” of low inflation and unemployment. 

The question I have is this: is it U-3, U-6 or something else they are most interested in? I’ll leave that to the Fed board to answer!