US unemployment set to fall significantly further
WASHINGTON: US unemployment is primed to fall significantly further and could drop below 3% for the first time since 1953, the year central bank chief Jerome Powell was born.
That’s according to economists at Goldman Sachs Group Inc, JPMorgan Chase & Co, Deutsche Bank AG and Moody’s Analytics Inc.
With an already solid economy set to receive a double dose of fiscal stimulus, they argue that a drop in joblessness from its 17-year low of 4.1% in February is all but inevitable.
And they said that a break below 3% is a distinct possibility – even with the return of some workers to the labour force – especially if Federal Reserve chairman Powell doesn’t do more to slow the economy down.
“We have unemployment at 3.25% by the end of 2019,” Jan Hatzius, Goldman’s chief economist, said in an e-mail. “A decline below 3% at some point is obviously possible.”
Such a drop would return unemployment to levels not seen in 65 years, when millions of Americans were out the labour force serving in the military during the Korean War. A job market that tight would be a boon for workers and for President Donald Trump.
But it would pose a quandary for monetary policymakers who are already beginning to worry about the risk of the economy overheating after Trump and Congress agreed to cut taxes and increase government spending.
To head it off, the central bank will raise interest rates four times each in 2018 and 2019, significantly more than Fed officials and investors currently expect, the Goldman, JPMorgan and Moody’s economists predicted.
Peter Hooper, chief economist for Deutsche Bank Securities in New York, said there’s even a risk the Fed could end up increasing rates five times this year.
“If the unemployment rate continues to decline on the current trajectory, it could fall to levels that have been rarely seen over the past five decades,” Fed governor Lael Brainard said in a March 6 speech.
“Historically, such episodes have tended to see elevated risks of imbalances, whether in the form of high inflation in earlier decades or of financial imbalances in recent decades.”
After beginning 2017 at 4.8%, joblessness has held at 4.1% for five straight months. It would have tumbled in February save for a big jump in labour force participation that Hatzius forecast won’t be repeated.
Payrolls, meanwhile, grew 313,000, the most since 2016 and above the 90,000 to 120,000 range Fed officials reckon is sustainable in the long-run.
The steep drop in unemployment foreseen by the private economists stems from above-potential growth – Moody’s Mark Zandi sees the economy expanding 2.9% this year versus potential of 1.75% – and not from a contraction in the work force.
Indeed, the forecasters all expect the labour force participation rate to hold roughly steady, as the re-entry of discouraged workers into the labour force is counterbalanced by the retirement of aging Baby Boomers.
Dartmouth College professor and former Fed official Andrew Levin said that may be too conservative. He sees room for labour force participation to rise, especially for prime age adults aged 25 to 54 – a portion of the population that Powell highlighted in recent Congressional testimony.