GDP, inflation, unemployment

Between October 2009 and October 2015 the American unemployment rate fell from 10.0% to 5.0%. Over the same six years the share of adults in the labor force fell from about 65% to about 62.5%. Both numbers improved the story politicians told and only one of them was about people finding work. Learning to read the second number is most of what this lesson is for.

The three numbers and what each one is

GDP is the market value of everything produced in a country in a period. It counts transactions. Inflation is the change in the price of a fixed basket of goods. It counts prices. Unemployment is the share of people who want work and cannot find it. It counts a specific and narrow definition of wanting.

Each is a genuine attempt to compress an economy into one figure, and each fails in a specific way that is written into its definition rather than hidden in the methodology. The failures are the useful part, because they tell you which second number to go and find.

Unemployment: watch the denominator

To be counted as unemployed you must have no job and have looked for one in the last four weeks. Stop looking and you leave the labor force, which is the denominator, and you also leave the numerator. The rate falls.

Below is a population of 252 million adults in five boxes. Try to improve the headline rate.

Two of the six moves improve the headline without anybody getting a job, and one of them makes it worse while nothing bad happens at all. That is not a defect in the statistic. It is what the statistic means, and it is why every serious labor market discussion cites the participation rate alongside the rate itself.

The 2009 and 2015 figures are Bureau of Labor Statistics series LNS14000000 and LNS11300000, both free on the BLS site and on FRED. U-6 is published monthly in BLS Table A-15, where the definitions above are also set out. At the April 2010 peak, U-3 was 9.9% and U-6 was 17.1%.

Inflation: the basket is not your basket

A price index prices a fixed basket, weighted by what an average household spends. Shelter is roughly a third of the American consumer price index, and about three quarters of that shelter weight is owners' equivalent rent, which is an estimate of what homeowners would pay to rent their own houses. It is a real cost and nobody writes a check for it.

This matters because the average household is a construct. A 23-year-old renting in a city and a retired couple who own their home outright face the same index and very different prices. When your personal experience disagrees with the figure, the usual explanation is that your basket is not the published one.

ConventionCore inflation strips out food and energy, which sounds like removing the things that matter. The reason is that those two prices are volatile and mean-reverting, so including them makes it harder to see the trend that monetary policy can actually act on. A central bank watching a headline number driven by one bad harvest would respond to weather. Read core for the direction and headline for what you are paying.

GDP: it counts spending, so it counts the wrong things too

GDP counts market transactions. Anything valuable that happens without money changing hands is invisible to it, and anything wasteful that involves money is visible.

Unpaid work is the biggest hole. A parent caring for their own child produces nothing measurable; the same parent taking a job and paying somebody else to do the same care produces two increases in GDP. Environmental damage is the other direction: the output shows up and the depletion does not. And rebuilding after a hurricane adds to GDP while the hurricane subtracted nothing, which is why the figure sometimes rises after a disaster.

None of this makes GDP useless. It makes it a measure of activity rather than a measure of wellbeing, and the trouble starts when people use the second word while quoting the first number.

What to do with this

Pair every headline with its companion. Unemployment goes with participation or the share of adults working. Inflation goes with the components, because knowing that shelter drove it tells you more than the total does. GDP goes with per head, and with median income if the question is about living standards.

And when a number moves a lot in one month, check whether the definition moved with it. In April 2020 the unemployment rate hit 14.7%, and the BLS said in the same release that misclassification in the survey meant the true figure was several points higher. The agencies publishing these numbers are usually the first to tell you where they break. It is the people quoting them who leave that part out.