The multi-year bull run in the U.S. labor market is in its seventh consecutive year. Since the end of the 2007-2009 recession, the national unemployment rate has declined from 10 percent to its current level of just 4.4 percent. Over the past 92 months, the economy has averaged more than 184,000 new non-farm jobs each month.
The U.S. Department of Labor’s monthly Employment Situation reports the number of jobs added, employee wage growth and the current national unemployment rate. The non-farm jobs data is the benchmark gauge for job growth, reflecting the change in the number of Americans employed, excluding the farming industry, private household workers and non-profit organizations.
Employers added 156,000 non-farm jobs in August. However, this was below the consensus estimate of 180,000 and the second consecutive month of declining job growth. The jobs numbers for June and July were also revised downward by a combined 41,000. The national unemployment rate rose from 4.3 percent, a 16-year low, to 4.4 percent.
Despite the pullback in recent months, the labor market this year remains solid, averaging more than 175,000 new jobs each month. This is slightly below last year’s pace but well above the 100,000 monthly average needed to absorb new entrants into the labor force and keep pace with economic growth. The Federal Reserve projects a sustainable unemployment rate of 4.3 percent in 2017 and a rate of 4.2 percent in 2018 and 2019.
The Fed expects the labor market to continue at, or near, full employment — the point at which nearly all job seekers have found work. Simply stated, it is the maximum number of persons who can be employed at a given time, with an optimal unemployment rate somewhere above zero percent. All others are considered to be voluntarily unemployed, lack the requisite job skills or are in-between jobs.
The significance of full employment is its impact on the U.S. economic landscape. As the labor market tightens, market forces push wage growth higher as employers compete for skilled and capable workers. Higher employee income leads to a driving consumer demand for goods and services, propelling inflation and economic growth.
The unemployment rate has been near the 16-year low of 4.3 percent for the past six months. Yet, inflation has been on a downward spiral since January, and annual wage growth has remained stuck at 2.5 percent for the past two years. These are certainly not the signs of an economy at full employment.
So, has the U.S. labor market reached full employment, or is there still room for extended growth?
For insight we look to the U-6 unemployment rate. The U-6 rate is released in the monthly U.S. Department of Labor’s employment report, along with the U-3, the official headline unemployment rate we traditionally follow. The U-6 reveals a broader measure on the nation’s unemployment rate and provides a more accurate assessment of the pulse of the employment situation.
The U-6 includes the traditional unemployed — those who are jobless, actively seeking work and available to take a job. But unlike the official U-3 rate, the U-6 also includes those who have quit looking for a job and part-time workers seeking full-time employment. In other words, it consists of the unemployed, the discouraged and the underemployed.
The current U-6 rate is 8.6 percent. A year before the recession it was just 7.9 percent. Many analysts, and even some Fed officials, believe the U-6 rate has room to go lower. Unlike much of the economy, it still remains above its pre-recession levels. Therefore, they argue that further strengthening in the labor market can be expected.
Obviously, continued strength in the labor market is good for the American public. But for the Fed, it provides a delicate quandary. If the Fed believes the U.S. economy is currently at full employment, it may prematurely raise interest rates anticipating that wage growth and inflation are right around the corner. This could well put a halt to the existing moderate, yet stable economic expansion.
If the Fed plays its interest rate cards correctly, the added job growth that many suggest should further fuel wages, inflation and ultimately, accelerated economic growth. Without question, the foundation of the economy is consumer spending. The U.S. economy has been plodding along now for nine straight years at an average rate of just 2.1 percent. A fully employed American workforce flush with cash can certainly elevate the economy to a higher gear.