The unemployment rate in the U.S. has fallen to 4.3% as of May 2017 – its lowest level since 2001. But, the pace of job growth has slowed down at the same time. So, is this record-low unemployment level a façade to firms’ hiring challenges?
While unemployment rate fell in May, the number of jobs added receded to +138,000, compared to the previous month’s +174,000. May’s job addition was also substantially below the average of +181,000 of the prior 12 months.
This Time It Is Going to Be Different…and Better
Back in 2001, the low unemployment rate was accompanied by net job losses almost every month and a cooling off of economic growth over the year. But, that should not suggest any recessionary pressures at the present. That’s because except for the same unemployment rate, the current economic situation is much different from that of 2001.
The labor force participation rate was almost 67% in 2001. It has been on a downtrend since and went below 63% as of May 2017. Sixteen years ago, workers’ compensation was growing at a solid average of +4% (average) year-over-year for each quarter. In comparison, it grew at a moderate +2.4% as of Q1 2017 (per Bureau of Labor Statistics data). The Fed funds’ rate in 2001 was 4.5%, much higher than today’s 1% – a difference which potentially reflects firms’ borrowing costs in the two periods (data from a CNN report). All this indicates that compared to present conditions, there was much less room to revive job creation in 2001. Looking back at the 2001 environment, increased pay growth rates and relatively high-interest costs were probably pressuring firms’ margins, constraining their ability to boost employee headcount, something which held back output growth during that period. (U.S. GDP grew at a meager 0.9% in 2001, slowing down from the preceding four years’ average of more than +4% per annum). Compared to 2001, firms are better positioned at present (especially with strong corporate earnings in recent quarters) to boost wage growth for luring more workers and/or retaining existing employees from joining rival firms.
The likelihood for higher wage growth gets potentially bolstered by recent job openings figures, which reveal an apparent skills gap that recruiters might be facing. In April, the number of job openings in the U.S. increased by +259,000 positions to reach a series high of 6 million. But, the number of hires dipped in the same month by -253,000 to 5.1 million (according to the U.S. Bureau of Labor Statistics data).
Employers probably need to accelerate pay growth to incentivize qualified workers to fill in the open positions. Or, companies could invest in training workers for improving their skills in case of which employee productivity would likely improve, thereby potentially translating into higher wages.
Bottom Line for Investors
The 16-year low unemployment rate along with record high job openings indicates solid demand for labor in the U.S. economy. At the same time, the labor market is tightening, and therefore, upward pressures on wage growth are expected to manifest soon. With higher paychecks, consumer demand could get bolstered, and that could potentially influence inflation rates and/or economic growth.
This is just one of the instances that reiterate how important it is to stay up-to-date on macroeconomic dynamics while forming expectations on economic output and prices. To learn more about all the latest economic developments and their potential impact on your portfolio, get in touch with us a 1-888-600-2783. In the meantime, check out our latest Stock Market Outlook report. This exhaustive briefing discloses data and forecasts on GDP growth, inflation, global & domestic risk factors, unemployment and interest rates. Read this report to get a leg-up over other investors! Click on the link below to get your free copy:
Disclosure