From the President's Desk: The Incredibly Low Unemployment Rate

We often hear that the U.S. economy will remain robust through 2019. Normally, this is from people who are not in tune with our plethora of leading indicators. They instead quote today’s extremely low unemployment rate as proof that the U.S. economy will continue to grow through the rest of 2019 at the first-quarter’s impressive GDP nominal growth rate of 5.1%. It is easy to understand the thought process: If employment is that tight, then it must mean the economy is firing on all cylinders.

The seasonally adjusted unemployment rate through April was 3.6%, the lowest in just over 49 years. The rates-of-change portend more downward pressure on the unemployment rate through the near term; however, the mild decline occurring in the U.S. Industrial Production 12/12 rate-of-change suggests that the downside cyclical pressure on the unemployment rate will be moderating in the next few months.

A low unemployment rate does not automatically translate into unmitigated robust growth throughout the economy. For instance, according to the Bureau of Labor Statistics, employment in the U.S. stands at 156.345 million people (12MMA, seasonally adjusted). That is down slightly from the February 2019 record high. The employment rates-of-change are moving lower in Phase C, signaling more downside pressure on the 12MMA in the months to come. The rate of growth for the three months ending in April (3/12) was a thin 1.0% above the year-earlier figure. This is the slowest rate of growth in approximately five years. Thus, while the unemployment rate is getting smaller, the number of people working in the civilian sector has edged lower. A robust economy needs more people working, not less, to grow consumption and thus provide for a strong growth rate in the overall economy.

Nonfarm job openings in the latest month with available data stood at 6.708 million, the lowest number of job openings in 11 months. Part of the reason for the decline in openings is seasonal, but the rates-of-change are moving lower in Phase C, signaling downside business cycle pressure (not just seasonal pressure) on job openings. That makes sense, given that the number of people working has plateaued or begun to edge lower.

It is natural and easy to latch onto the unemployment rate and project strong employment and economic growth off that one piece of information. However, the trend in the number of people working and the trend in the number of job openings are consistent with our projection of a soft landing in GDP for 2019. The employment trends line up perfectly with our proprietary leading indicators and other leading indicators we use at ITR Economics. Our forecast calls for GDP to end 2019 0.9% above 2018, resulting in the softest rate of growth since 2009. Labor rates are not likely to go down, and you won’t find it easier to find qualified labor, but neither of those mean your revenue will increase at the pace you enjoyed in 2018.


Alan Beaulieu