Good news for the economy continues to appear. The Wall Street Journal noted that “Economists expect the low U.S. unemployment rate to go even lower over the next year, reaching levels not seen in a half-century.
Private-sector economic forecasters surveyed in recent days by The Wall Street Journal on average saw the jobless rate—4% in June after touching 3.8% in May—falling to 3.7% by the end of 2018 and 3.6% by mid-2019.”
It hasn’t been below that level since December 1969, when it was 3.5%.
Unemployment has rarely been lower than it is now outside of wartime, when defense production ramped up and many men in their prime working years were serving overseas.
- Do You Own Any of These Toxic Stocks?
Investing legend Louis Navellier just released a list of 250 toxic stocks to SELL NOW.
Some will drop even further from here.
Other are “zombie” stocks that will take years to recover.
Some won’t survive. 10 minutes is all it takes to give your portfolio a complete checkup and sleep easier knowing you don’t own any of these ticking time bombs.
Since the Labor Department’s monthly records began in 1948, the lowest jobless rate was 2.5% in May and June 1953, near the end of the Korean War. Annual unemployment was 1.2% in 1944, at the height of World War II.
The Problem With Low Unemployment
Low unemployment seems like it should be good news. But, economists worry that there are dangers associated with low unemployment. One is the well known fear that inflation will grow.
Inflation comes from the competition for the dwindling number of potential employees. Economists argue that when employees are difficult to find, employers will be forced to raise wages and those higher wages will result in higher costs that will result in higher prices.
This fear could be a problem for the future if individuals join the labor force or if the number of individuals who switch jobs voluntarily rises. Both of these factors seem to be occurring,
Since 2016, the number of workers has increased as shown in the table below. This is measured by the employment population ratio and the recent gains reverse a long down trend in that ratio. A higher employment population ratio potentially relieves some of the pressure on wages.
The table shows the gains have been broad based and occur in prime age groups and across all demographic groups. This indicates there are potentially workers available, despite the low unemployment rate.
A second factor is measured by the “quit rate” which is shown in the next chart.
MarketWatch reported that, “The percentage of people in the private sector who left their jobs by choice rose to 2.7% from 2.5%, the government said this week. The so-called quits rate among all workers edged up to 2.4% from 2.3%. Both hit the highest levels since 2001.
Most workers who leave jobs voluntarily end up getting better pay or benefits elsewhere. More people are willing to make the switch when the economy is booming.
As the rising quits rate shows, more workers are striking out for better jobs or better-paying jobs, confident they’ll succeed. If more workers do that, it could force companies to raise wages faster to retain their best employees or to attract new ones.
“The rise in the job quits rate points to wage growth accelerating to 3% by the end of the year,” said senior U.S. economist Michael Pearce at Capital Economics.”
The Fed Is Watching Employment Closely
Accelerating wage growth is a significant concern for economists. Many economists believe unemployment cannot remain below a certain level, sometimes called the natural rate of unemployment, without causing the economy to overheat and produce damaging inflation, financial bubbles or other distortions.
Estimates for that lowest sustainable unemployment rate vary widely. Federal Reserve policy makers estimate the normal long-run unemployment rate at somewhere between 4.1% and 4.7%, with a median forecast of 4.5%.
The current level of unemployment is well below that level, which is concerning to the Fed.
“We are below it, and will be increasingly below it,” David Berson, chief economist at Nationwide Mutual Insurance Co. told The Wall Street Journal.
But, economists believe the natural rate of unemployment changes over time, depending on structural forces in the economy, such as productivity growth. That leaves room for optimism.
“While persistently strong economic conditions can pose risks to inflation and perhaps financial stability, we can also ask whether there may be lasting benefits,” Fed Chairman Jerome Powell said in a recent speech at a European central Bank forum.
For instance, he said, “a tight labor market could draw more people into the labor force,” and there might be “benefits to productivity and potential growth.”
Powell believes that low unemployment and economic stability are a potential threat to the stability of the financial system. He noted how this could work:
“…we have often seen confidence become overconfidence and lead to excessive borrowing and risk-taking, leaving the financial system more vulnerable.
Indeed, the fact that the two most recent U.S. recessions stemmed principally from financial imbalances, not high inflation, highlights the importance of closely monitoring financial conditions.
Today I see U.S. financial stability vulnerabilities as moderate and broadly in line with their long-run averages. While some asset prices are high by historical standards, I do not see broad signs of excessive borrowing or leverage. In addition, banks have far greater levels of capital and liquidity than before the crisis.”
To some investors, the confidence of the Chairman of the Federal Reserve could be a warning sign of potential problems.
They point to Chairman Alan Greenspan’s concerns about a stock market bubble in 1995 were misplaced by several years. There is also the example of Ben Bernanke’s thoughts on the housing market in 2007:
“Our assessment is that there’s not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.”
He was spectacularly wrong on that call and traders are right to worry when a Fed Chair becomes overconfident. Ironically, Powell acknowledges overconfidence can be a problem before expressing his confidence in the current environment.
Eventually, the employment situation will create problems for the stock market. Timing this change properly could increase the probability of gains. The TradingTips.com service, PPK System, is designed to exploit patterns associated with market clues by looking for value and momentum in stocks.
This combination of value and momentum has been shown by many researchers to be the cornerstone of strategies that beat the market in the long run. The PPK System follows strict rules for buying and selling. You can learn more about this trading service by clicking here.