Solid US Expansion Should Keep Unemployment at a Multiyear Low


Sep. 6 2018, Updated 7:32 a.m. ET

Unemployment rate sits at a multiyear low

The unemployment rate for July fell 0.1% sequentially to 3.9%, its lowest point in nearly 18 years. The rate has been under 4% for four consecutive months. The Fed is forecasting an unemployment rate of 3.5% by the end of this year.

Another highlight of July’s unemployment data was that the unemployment rate for the least educated US workers fell to 5.1% in July, the lowest point since the government started collecting data in 1992. These workers were hit the hardest during the Great Recession.

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How low can the unemployment rate go?

The unemployment rate hit 3.8% in 2000 as well. However, there’s a basic difference between then and now. In 2000, the labor force participation rate was 67% compared to July’s 62.9%. As more people start actively looking for jobs, the unemployment rate will show a more accurate picture of the job market.

In a healthy economy, there is always a natural rate of unemployment. The unemployment rate can’t fall to practically zero because there’s always some level of unemployment for a variety of reasons, including the following:

  • people leaving their current jobs to look for new ones
  • a mismatch between workers’ skills and job requirements
  • seasonal factors

Unemployment rate and market consensus

According to the consensus compiled by Bloomberg, economists expect the unemployment rate to fall to 3.8% in August from July’s 3.9%. The unemployment rate hit 3.8% in May as well. If the rate slips to 3.7%, it will be at its lowest point since 1969. Many economists think that even as the labor force participation rate increases, unemployment levels could near 3.5% toward the end of the year.

The Fed is judging “full employment” as being consistent with 4.5% unemployment or lower. A level of 3.8%, as expected by economists, should be consistent with the Fed’s gradual rate hike (BND) path scenario. The level shouldn’t have much of an impact on the markets (SPY) (VTI).


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