How team Trump sees unemployment and why it matters

[WASHINGTON] Donald Trump has long cast a skeptical eye on the official unemployment rate - and this week, both Treasury secretary nominee Steven Mnuchin and White House Press Secretary Sean Spicer have clarified what the president might mean when he says the jobless figure isn't real.

While they've stopped short of defending Mr Trump's most extreme claims, Mr Mnuchin and Mr Spicer have upheld his broader point that headline unemployment understates labour market slack.

That's important, because team Trump's insistence that weakness persists could affect how they view fiscal policy proposals as the new administration takes office.

What is Mr Trump talking about, what are his officials getting behind, and how could it come to inform policy? Let's run through the numbers.

Tough to defend: 42 per cent unemployment, 96 million jobless

Mr Trump said early last year that the jobless rate was probably 28 per cent or 29 per cent, though he'd "heard" figures as high as 42 per cent.

That's way above the official level, which stood near 5 per cent when he made the remark and has since fallen to 4.7 per cent. Mr Trump has stuck with his line of thinking post-election, saying earlier this month that in America there are "96 million really wanting a job and they can't get" and "that's the real number".

It's true that about 96 million adults are neither working nor looking for work. What's more, if you counted all of those people as unemployed along with 7.2 million people who are still actively applying to jobs, the jobless rate as a share of the total adult population would come in north of 40 per cent.

But there's a big problem with viewing adults who aren't in the labour force as a sign of economic weakness: that group includes people who are retired, who are in education or training, and who choose not to work because they're rearing children or caring for loved ones.

In fact, just 5.4 million people who aren't in the labour force report wanting a job. Both Mr Mnuchin and Mr Spicer have been asked about Mr Trump's 42 per cent unemployment. Neither defended that specific figure.

Easier to support: slack is under-counted

Mr Mnuchin did stick up for his boss's assertion that the official unemployment rate isn't real. The official rate "is not a sufficient indicator of labour market health," Mr Mnuchin said in written response to a senators' question released Monday.

Likewise, Mr Spicer said Monday that Mr Trump's economic team will look at "a multitude of statistics" in assessing labor market strength. Mr Mnuchin said "excessive influence" is placed on the headline unemployment index to inform fiscal policy decisions.

He said a fuller understanding of labour market health would need to account for measures of slack like the U-5 rate, a broader index that includes both people currently applying for jobs and those who have looked for a job some time in the prior 12 months.

Even U-5 is nowhere close to the jobless rates Mr Trump has suggested. That said, Mr Mnuchin also stressed that the labour force participation dropped sharply during the Obama administration and needs to be taken into account.

Here's one rough way to take Mr Mnuchin's participation concerns into account. If you add everyone who has joined the "out-of-labour-force" crowd since the start of the 2007-2009 recession to the current unemployed population, that modified jobless rate comes in around 13.4 per cent.

Including part-time workers who would prefer a full-time job, another oft-cited gauge of weakness, pushes that rate up to 16.7 per cent. It's worth noting that much of the drop in participation has come from population aging, so this gauge isn't a fair measure of slack.

The implications

Now that we know more which indicators Mr Trump's team cares about, we can talk about how it will inform their view on fiscal policy. If there's significant weakness remaining in the labour market, as they continue to argue, a big government spending package could seriously boost growth.

In that context, the significant tax cuts and infrastructure spending Mr Trump pledged on the campaign trail make a lot of sense. If instead the labour market is strong, as the Federal Reserve and most mainstream economists contend, massive fiscal outlays risk boosting demand for everything from workers to raw materials, spurring inflation and even fuelling bubbles.

As a result, such policies could inspire tighter monetary policy that would offset some of the gain in growth.

"You run the risk of, if you do too much fiscal stimulus, causing the economy to overheat," said Ryan Sweet, an economist at Moody's Analytics Inc.

If slack has mostly eroded and a massive spending project comes out of Congress and the White House, "The Fed is going to have to counter fiscal stimulus by raising rates."

BLOOMBERG