Intro: Despite being very closely-watched economic indicators, unemployment figures lag behind actual economic activity and therefore give little insight into future growth. It is often even a contrarian indicator meaning that elevated levels of unemployment tend to indicate stronger-than-usual economic growth.
While it is true that real GDP growth is a factor of how many people are employed, labour market trends are lagging economic indicators, which means that increased employment tends to come after a pick-up in growth and vice versa, generally because it takes time to hire and fire people. Any improvements in an employment situation will only happen if businesses find profit opportunities, and in fact, these profit opportunities tend to be highest when the unemployment rate is high and therefore labour is relatively abundant and cheap. For this reason, periods of high unemployment tend to result in strong growth over the coming quarters.
This relates closely to the output gap; the difference between where real GDP is currently and where it ‘should’ be based on its potential. Typically, when real GDP is a long way below potential, there will be a tendency for growth to rebound. This makes sense as recessions tend to restore profitability and allow growth to recover. This explains why times of high unemployment tend to give way to rebounds in economic growth.
Despite being a lagging economic indicator, employment figures tend to have a large impact on financial market moves in the near term as they provide a relatively timely indication of economic health owing to the fact that they are often released with a very short time lag. For instance, US nonfarm payroll figures are released within a week of their occurrence, in contrast to other variables which can take several months. Nonetheless, the data tends to be subject to substantial revisions rendering the initial releases relatively meaningless, particularly with regards to the outlook for the economy over subsequent months and quarters.