PMC Weekly Review - May 29, 2015

A Macro View – U.S. Employment Picture Continues to Improve

The U.S. unemployment rate again ticked lower, and now is at 5.4%, its lowest level since the financial crisis hit. The longer-term trend clearly has been trending down, but the overall employment picture has been uneven along the way. As background, the U.S. unemployment rate peaked at 10% in October of 2009, according to the U.S. Bureau of Labor Statistics. In the shadow of the financial crisis, many thought that the rate could spike higher. In contrast, although concerns and worries still abound, the sentiment now is decidedly more positive than during those dark days.

The “official” or “headline” rate of 5.4% is the U3 level of unemployment. It includes all people without jobs who have looked actively for work within the past four weeks. With the U.S. labor participation rates at multi-decade lows, the Federal Reserve (Fed) looks at additional indicators of labor market health. One of these, the U6 measure, takes a more comprehensive look at our labor market. It is the broadest view, and its percentage of the labor force includes not only the total unemployed but also people marginally attached to the labor force, plus those employed part time for economic reasons.

Many view the U6 as the “real unemployment rate”. It is a more complete picture of the U.S. economy: since it includes workers who either are underemployed or have given up looking for a job, at least for the time being. This rate likewise has fallen significantly from the period immediately following the financial crisis: it peaked at 17.1% in late 2009 into early 2010, and now is at 10.8%. Interestingly, and symbolic of the muddled and uneven nature of economic data points, this statistic may give the Federal Reserve (Fed) cause to delay a rate increase until 2016, since although the rate has dropped dramatically, it remains high on an absolute basis.

Another positive sign of a healthier jobs environment is the decline in the number of unemployed persons per job opening: from a 2009 peak of near 7, it now is below 2, according to the U.S. Bureau of Labors Statistics. This figure indicates how many people are looking for work relative to the number of positions available, and measures the competitiveness of finding a job.

The macro-level impact of these figures is significant. The underlying strength of the labor market is a key input (but certainly not the only one) into the Fed’s decision on when (and by how much) to raise short-term interest rates. Since the Fed has stated that its decision will be based on data, rather than on the calendar, the employment metric is critical. A more robust U.S. labor market signals a stronger underlying U.S. economy, and may prompt the Fed to raise interest rates sooner rather than later to avoid the risk of the economy overheating by keeping rates too low for too long. Interestingly, positive economic news has occasionally, and perversely, led to market declines in the short-term, including the past week, when stronger housing data was released. As background on this phenomena, the Fed’s policy of near-zero short-term interest rates was a key driver of investors’ returns in recent years. In addition, it had an impact on items ranging from yields on certificates of deposit to the performance of the bond market and the future attractiveness of stocks. The Fed’s eventual change in interest policy may have a dramatic effect on financial markets.

Of course, the Fed has a complex challenge in determining the optimal timing and level of short-term interest rates. Other variables, including inflation, threat of deflation, wages (which have been fairly stagnant), and global economic health and central bank decisions, also play an important role. Improved U.S. employment, and its massive impact on the economy, remains a key input into the Fed’s rate decision, and may serve as impetus to raise rates either later this year or early in 2016.

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