It's So Much Better (Or Worse) Than You Think

Stick yourself in a room with Bill Gates, and the room's average net worth will be around $25 billion. This, though, tells you nothing useful.

Yet we do this kind of stuff all the time. A failure of journalism, particularly business journalism, is the tendency to lump complex things into singular groups, as if everything were a monolith. We talk about the economy. The stock market. The unemployment rate. The consumer.

There's really no such thing. All of these topics are made up of incredibly diverse parts so skewed that averages become misleading.

The different faces of unemployment
Take unemployment. When we talk about unemployment, we typically look at the average rate -- currently 9.4%. This, though, doesn't tell us much. When broken up into different groups by, say, the duration of unemployment, a more accurate -- and fascinating -- view of the jobless emerges.

Sources: Bureau of Labor Statistics, author's calculations.

Two points should stick out:

  • For those out of work less than five weeks, unemployment is actually lower today than it was in 2000, when the economy was booming and average unemployment was at a generational low.
  • For those out of work for more than 26 weeks, unemployment is eight times as high today as it was in 2000.

This adds an important caveat to the average unemployment rate that we so frequently reference: The rate is heavily skewed by the chronically unemployed -- a relatively small group, most of who lost their jobs in 2008 and 2009 and have remained unemployed since. The majority of those who have become jobless more recently are finding new work fairly quickly, just as they would in a normal economy. If you survived the brief layoff massacre of 2008-2009, odds are your job prospects are quite good today.

That isn't usually how it works. Consider what New York Times columnist David Leonhardt found last summer: "Over the course of 1980, 18.1 percent of the labor force was unemployed at some point. In 2008, the first year of this slump, only 13.2 percent was."

Or look at wages. Wages normally drop during recessions as job seekers lose bargaining power over employers. Not this time. Real average hourly pay is up over 5% since 2007. Nominal wages are up, too. Not only did a large majority experience uninterrupted employment during the recession, but most did so while receiving a raise. As a result, real consumer spending recently hit an all-time high even as unemployment and the savings rate have surged.

Or even look at geography. The average unemployment rate is 9.4%, but the variance by state ranges from 3.8% in North Dakota to 14.3% in Nevada. Looking at the state-by-state breakdown of unemployment tells a clear story: States that went berserk in residential real estate and those reliant on the ever-downsizing General Motors (NYSE: GM  ) are doing abysmally, while a good portion of everyone else isn't doing half bad.

The same is true for corporate earnings. From mid-2009 to mid-2010, about half of the S&P 500 posted higher -- much higher -- earnings than before the recession began in 2007. Earnings for the other half fell off a cliff.

A tale of two labor markets
What this all shows is an overlooked feature of the past three years: The economy became bifurcated. Most people survived the recession just fine, but a relatively small group of folks have been hit unimaginably hard. The averages that we pay so much attention to have become meaningless, as the majority of us are clustered on polar ends of the scale.

There are two ways to look at this. One is to focus on the 10% to 20% of those whom the recession has been particularly harsh on. The other is to focus on the 80% to 90% who are doing pretty well -- maybe even better than ever. When we do manage to look away from the averages, most of our attention is on the former group -- if only because it's exciting and emotional. It's common for bears to then anchor to this group and question the recovery's legitimacy. How can the stock market be rising and corporate profits booming when I just read a story about a guy who's been unemployed for two years?

This view is both wrong and unhealthy. The strong 80% to 90% are working, earning, spending, saving, innovating, and healing the economy, and they're doing a good job of it. They're the ones driving the recovery. Focus on these folks, and things aren't nearly as bad as they look.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. General Motors is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2011, at 5:37 PM, Borbality wrote:

    I like your stories and appreciate seeing things put into their more optimistic perspective, but for those of us living in those hard-hit areas, it remains to be seen if there is any end in sight. For many high-population parts of the country with no real industry, this ridiculous real estate thing was all we had. Population growth, rising values and equity lines, construction jobs, etc. etc.

    I just don't know if these areas will ever recover without some kind of new industry to pick up the slack. It's going to need to be real infrastructure/physical technology stuff to get the lower classes back to work, too.

  • Report this Comment On January 21, 2011, at 9:54 PM, xetn wrote:

    Talk about your optimistic stats: according to shadowstats.com, which tracks all kinds of economic data according to the way they were originally calculated before the "powers that be" decided to misrepresent the data to be more "acceptable" the current unemployment stats are: over 20%

    http://www.shadowstats.com/alternate_data/unemployment-chart...

  • Report this Comment On January 22, 2011, at 4:54 AM, RRGGBB wrote:

    I always prefer an optimistic point of view. I do not understand the appeal for driving a negative point to instill fear in the masses. I strongly believe in supporting positive growth and innovation.

    A side note: One groups I hear little about are the senior citizens that have had their nest egg wiped out and income from dividends disappear. There is little chance for them to recover.

  • Report this Comment On January 23, 2011, at 5:55 PM, neutrinoman wrote:

    I wouldn't trust ShadowStats. They're very scattershot in their approach and make basic statistical and conceptual mistakes. For example, they don't understand the difference between expansion of the money supply and price inflation. That is, they don't understand money velocity.

    That's not to say that stats aren't spun and twisted around by the govt; they are. The Fed focuses obsessively on the "core" inflation rate (ex food and energy), which is a self-serving way for them to ignore the way that extreme monetary ease is setting off commodity prices. The Fed obtusely still denies its role in the housing bubble.

    But the "real" numbers are there. You just have to look underneath the headlines. The U6 unemployment rate measures unemployment in a way more like the way it was measured in the 30s. It counts discouraged and underemployed workers too. It's currently about 17%. Even better is the labor force participation rate, which has dropped dramatically in the last four years, with early retirements and people dropping out of the labor force.

    So the article is right: those of us with regular, full-time employment are doing better now than in 2007. But that's far from everybody, and it's not wrong for us to be concerned about the fate of the rest of the economy.

  • Report this Comment On January 25, 2011, at 2:07 PM, bigcat1969 wrote:

    Good writeup. Those are very interesting numbers that make me wonder if there is an age breakdown as well. As someone who occasionally wants a part-time job for extra cash, but doesn't really need one to live, I've observed that being over 40 is the kiss of death in certain companies. Could it be that 20 and 30ish folks are the ones getting rehired quickly and those in their 40s and 50s are not as successful?

    Also what effect will the 99ers have on the economy since I can't see a more conservative congress extending benefits beyond two years. As unemployment dries up for the unemployable will the economy take a hit from the 5% or so (guess from the top of my head) that cannot either find any job or finally have to settle for a job that won't allow them to make mortgage and car payments and live at the level they are used to?

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