How Low Can Unemployment Go?
Compared to the dark days circa 2009, the unemployment rate in the U.S. is stellar — but how much better can it get? Although the rate actually increased to 4% in June from 3.8% in May, economists still expect it to fall in the months ahead. In fact, as The Wall Street Journal reports, some are suggesting that unemployment could be headed to a 50-year low.
Currently the Journal expects employment to reach 3.7% by the end of the year and retreat to 3.6% sometime in 2019. Interestingly, if the rate were to make it down to 3.5%, it would be the first time since December 1969 it had fallen that low. The few times the unemployment rate has fallen below that level have been during times of major wars, such as the 1.2% unemployment rate seen in 1944.
Despite the rosy predictions, economists say there’s likely a floor to the unemployment rate that we’re quickly approaching — if we haven’t reached it already. That’s because there’s a level of unemployment that’s believed to be a “natural rate,” meaning that anything below it could lead to an overheating of the economy. Side effects of such a situation could include major inflation among other issues. According to PNC Financial Services Group chief economist Gus Faucher, “The economy isn’t built to function at a consistent 3.5% unemployment rate.” Meanwhile other experts argue that the normal and sustainable rate is a bit higher, with a WSJ survey finding the average answer to be 4%.
Another side effect of a “hot” economy is that employers may have a hard time hiring. This is something we’ve already seen as the latest National Federation of Independent Business survey finding that 36% of businesses have open positions they can’t fill. That said, such a situation could serve to bring non-participants (who aren’t counted in the unemployment rate) to join or rejoin the workforce. KPMG LPP chief economist Constance Hunter expressed this sentiment to WSJ, saying “There is a hope that participation will increase slightly with a ’hot’ labor market. If this happens it will help dampen inflationary effects.”
Of course these days you can’t talk about the economy without discussing the on-going trade war the United States is engaged in with China and other nations. This week the U.S. unveiled a list of $200 billion in Chinese imports that would be hit with a 10% tariff. At this point it’s unclear how the continuing trade issues will impact economic growth and hiring, although it is certainly something to watch out for. However, even with those fears, it seems that the unemployment rate could soon make history as more Americans head off to work.