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The million dollar question 10 years into an expansion like this is, “is a recession coming?”

We have heard pundit after pundit claim that 2012 was the top. No 2013. No 2015. No 2018. Each, so far, has been wrong.

It makes sense why they do it. If they are seen as the investor that “called the top”, they instantly gain success for the balance of their careers. That means more media coverage, more book deals, and better asset inflows if they manage money.

This clearly has been one of the most hated bull markets in history, but even I, a “bottoms-up” investor, must admit that I am watching for signs of the top. Is a recession coming?

That brings me to the unemployment rate. Each time it has gone below 5%, this usually signaled that things can’t possibly get better and a recession would loom.

The unemployment rate got down to 3.7% in December 2018 which is one of the lowest levels since the 1960s. Does this mean the end is near?

Not so fast. The unemployment rate represents those people who are unemployed that are still in the labor force. Those who are not in the labor force are not counted. If we look at the labor force participation rate, it is at the lowest level in decades

Let’s put some math behind it then.

Using the data from the Bureau of Labor Statistics, I can see that a 4% unemployment rate equates to 6.5MM people looking for jobs. The flip side of that is that 162.5MM are in the labor force, but we know some have dropped out since the recession.

As such, let’s try to “normalize” the numbers. In other words, what if the participation rate went back up to ~66%. That would mean the labor force would grow by about 3%. That equates to 4.9MM workers. If these workers were counted in the participation rate, that would mean that the current unemployment rate is more like 6.8%.

Of course, these workers won’t enter the workforce without prospects of jobs, but even if 1/3 don’t, the unemployment rate ticks up to 4.8% from 4.0%.

Another factor this doesn’t include is underemployed workers. Think, college educated engineer who drives for Uber for employment. This is an exaggeration, but also not factored in the results.

Bottom Line: Be careful of scary statistics. “There are three kinds of lies: lies, damned lies, and statistics” Clearly unemployment is low, but that only tells one part of the story.