Is the US Economy at Full Employment?

It may not feel like it, but the US economy is at full employment. The Labor Department reported that the economy created 178,000 jobs in November, just under the 2016 average monthly creation of 180,000; and the unemployment rate fell to a nine-year low (August 2007) of 4.6 percent. According to the Federal Reserve, there is no magic unemployment rate that defines “full employment,” because that notion is largely determined by uncertain and “nonmonetary factors that affect the structure and dynamics of the job market,” which “may change over time and may not be directly measurable.” Still, in the Fed’s September 2016 Summary of Economic Projections, participants’ estimates of the longer-run normal rate of unemployment ranged from 4.5 to 5 percent and had a median value of 4.8 percent.

The 4.6 percent November print might make you think that we are indeed at full employment, but why the rate fell is also important. The slide occurred not just because of new workers finding jobs, there were also 226,000 people dropping out of the labor force. That amount surprised economists, who mostly told me, “let’s see what the coming months bring, before we come up with a reason behind the change.”

Meanwhile, the broader measure of unemployment (U-6), which includes part-timers who can’t find full-time work and discouraged jobseekers, who have given up looking for work, fell to 9.3 percent, a rate not seen since April 2008. The broad rate averaged 8.3 percent in the two years before the recession.

Besides the surprising decrease in the labor force, the other disappointment in November was the tenth of a percent slide in average hourly earnings, after a sharp rise in the prior month. Still, earnings were up at a 2.5 percent annual rate (compared with 2.8 percent in October), a decent clip with inflation remaining low.

This was the last important piece of data before the Fed’s last policy meeting of the year. While it was not sterling, it was certainly good enough to justify increasing rates by a quarter of a percent. Whether or not the central bankers will explicitly change their notion of full employment remains to be seen.

MARKETS: Investors took a breather from the post-election stock rally. Crude oil shot up over 12 percent on the week, after OPEC agreed to cut production in 2017.

• DJIA: 19,170, up 0.1% on week, up 10% YTD
• S&P 500: 2191, down 1% on week, up 7.2% YTD
• NASDAQ: 5255, down 2.7% on week, up 5% YTD
• Russell 2000: 1347, down 2.5% on week, up 15.7% YTD
• 10-Year Treasury yield: 2.39% (from 2.36% week ago, yields hit a 17-month high of 2.44% on Thurs)
• January Crude: $51.68, up 12.2% on week, largest gain since Jan 2009
• February Gold: $1,177.80, down 0.3%
• AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.12 wk ago, $2.05 a year ago)

THE WEEK AHEAD:

Sun 12/4: Italian Referendum: Voters will determine whether or not to change some aspects of the Italian constitution. (For more, see analysis by E.P. LiCursi at the New Yorker.) A no vote could unseat the current Prime Minister Matteo Renzi and potentially impact the weak Italian banking system and even Italy’s membership in the EU, often referred to as “Quitaly”.

Mon 12/5:

10:00 ISM Non-Manufacturing

Tues 12/6:

8:30 Q3 Revised Productivity and Costs

8:30 International Trade

Weds 12/7:

10:00 Job Openings and Labor Turnover Survey

3:00 Consumer Credit

Thurs 12/8

Friday 12/9

10:00 University of Michigan Consumer Sentiment

Is the US Economy at Full Employment?

Full employment is often described as the level of employment at which virtually anyone who wants to work can find employment at the prevailing wage. Given that over the last half century, the unemployment rate in the United States has ranged from a low of nearly 2 percent to a high of nearly 11 percent, what is the specific rate at which the economy has reached the magical level? According to the Federal Reserve, full employment is subjective. It’s “largely determined by nonmonetary factors that affect the structure and dynamics of the job market. These factors may change over time and may not be directly measurable.” In other words, your guess is as good as anyone else’s. In the Fed's March 2016 Summary of Economic Projections, the Committee estimated that the longer-run normal rate had a median value of 4.8 percent, but even if we drop to 4.8 percent when the government releases the March Employment report, that may not cut it.

The Fed also closely watches wage growth and hoping that it picks up from the paltry 2 to 2.5 percent seen during the recovery. Part of the problem is that even though job creation has been robust over the past few years, many of the new positions added have been lower paid ones, which has dragged down the average. As 538 Blog points out, this is perhaps why many American workers without college degrees are so angry. They have gone from working in factories, earning “more than $25 an hour before overtime” to the service sector, where “the typical retail worker makes less than $18 an hour…More than 80 percent of all private jobs are now in the service sector.”

Still, with the pace of average monthly job gains remaining above 200,000 and the labor market tightening, analysts believe that wage growth should accelerate this year. Until it does, most consumers are happy to see low inflation, which allows them to keep more of their paychecks. Indeed, the upward revision of Q4 growth to a still-slow 1.4 percent was due almost entirely from consumers, not from businesses. Consumer spending increased at a 2.4 percent annual pace in the final three months of 2015, up from a prior 2 percent estimate.

On Monday, the government will release data on Personal Income and Spending for March, which could provide a preview of the jobs report. Although wages have been disappointing, the addition of other income, like rental income, non-farm proprietors' income and investment income, the numbers look a little better: Personal income increased 4.4 percent in 2015.

MARKETS: Stock indexes snapped a five-week winning streak and that was before the holiday release of Corporate Profits, which fell 3.2 percent last year, versus increases of 1.7, 1.9 and 9.1 percent in 2014, 2013 and 2012 respectively. It was the first negative reading since 2008, but with energy prices moderating and dollar appreciation slowing, analysts expect that profits should rise this year, which could help the labor market.

• DJIA: 17,516 down 0.5% on week, up 0.5% YTD
• S&P 500: 2036 down 0.7% on week, down 0.4% YTD
• NASDAQ: 4773 down 0.5% on week, down 4.7% YTD
• Russell 2000: 1101, down 1.3% on week, down 3% YTD
• 10-Year Treasury yield: 1.90% (from 1.88% a week ago)
• May Crude: $39.59, down 2.4% on week
• June Gold: $1,218.70, down 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $1.98 wk ago, $2.42 a year ago)

THE WEEK AHEAD:

Mon 3/28:

8:30 Personal Income and Spending

10:00 Pending Home Sales

10:30 Dallas Fed Manufacturing Survey

Tues 3/29:

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Weds 3/30:

8:15 ADP Private Jobs Report

Thursday 3/31:

9:45 Chicago PMI

Friday 4/1

Motor Vehicle Sales

8:30 March Employment Report

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Consumer Sentiment