The Slack in the Labor Force Is Almost Out
Why We Think the US Economy Is Ready for Liftoff
To be sure, there still are some pockets of slack in the labor force, as well as areas where technological disruptions are causing stresses for workers. But the Fed’s monetary policy rate tools are unlikely to be of use to address these problems. Fiscal policies are needed there. In the meantime, the Beveridge curve shows a labor market at a high vacancy-low unemployment level typically associated with economic expansions, meaning the Fed’s dual mandate has been achieved without a doubt.
The economy’s relative strength, meanwhile, can also be seen in many other areas such as the household net-worth-to-debt ratio, which today resides near previous peak levels, as Bloomberg data shows.
Market Realist – The slack in the labor force has fallen significantly.
The US economy has created a whopping ~4.5 million non-farm jobs since March 2014 at a blistering average of 248,000 jobs per month. On average, the economy has created ~125,000 jobs since 2000, excluding the period during the Great Recession.
The number of new jobs in August was 173,000, which is less than in the previous three months that saw an aggregate of 750,000 jobs created. However, whether this is a start of a new trend remains to be seen. The jobs created in the last 18 months have taken a huge number of qualified applicants out of the unemployment pool, which suggests that we can expect a decline in payroll gains from here on. If the number does fall, it might make the normalization process more challenging.
Meanwhile, the final estimate for the US GDP (gross domestic product) growth rate for 2Q15 came in at 3.9%, which reinforces that the US (VTI) economy is on solid footing, especially relative to other developed economies (VEA) and at a time when emerging markets (VWO) are slowing down. While recent data suggests sluggishness in the manufacturing sector (DIA)(IYJ), it is mainly due to the strength in the US dollar.
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