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5.8% Unemployment Rate; A Sign of Better Economic Times, Or A “Greater Fools Paradise”?

Last week’s unemployment rate is a perfect example of the short comings with most risk models being used today that are heavily dependent on statistical data of the past.

If we were to take the most recent unemployment report at face value, one would be tempted to believe we were on the verge of being teleported back to the days when the “Greater Fool Theory” thrived; Monte Carlo risk simulation models could do no wrong and hourly wages / bonus increases had no limits. So why doesn't it feel that way; despite all the reported economic hype and exuberance surrounding the stock market after last week’s unemployment report?

In an effort to avoid prolonged debates regarding the accuracy behind the methodology of the most recent unemployment report, we may wish to approach the subject from a different angle? As it is widely known; a higher Labor Participation Rate index (LPR) has a direct effect on the total amount of disposable income in circulation; which fuel’s the economy's growth.

Thus, the opposite is true when the LPR numbers begin to recede. At the peak of the last economic expansion the LPR was approximately 66. At the present time the LPR is at a 30 year low of 62.8. Click here: http://data.bls.gov/timeseries/LNS11300000. This would seem to explain why the underpinnings of the present economy’s growth; doesn't feel nearly as strong as it did the last time the unemployment rate was below 5.9%.

A troubling note: Since the third quarter of 2013 the HCTI ratio has increased from 5.3 to 5.9, which has had a negative effect on LPR. As a consequence; the LPR may continue to be flat for the remainder of the year. The Feds departure from the bond market will not only lead to higher mortgage rates; It may also lead to higher HCTI, if hourly wages do not increase in tandem.

More information on the effects of Housing Cost To Income Ratios (HCTI), methodology and quarterly reports can be viewed here: https://economicgenome.blogspot.com