Is the US Economy at Full Employment?


It may not feel like it, but the US economy is at full employment. The Labor Department reported that the economy created 178,000 jobs in November, just under the 2016 average monthly creation of 180,000; and the unemployment rate fell to a nine-year low (August 2007) of 4.6 percent. According to the Federal Reserve, there is no magic unemployment rate that defines “full employment,” because that notion is largely determined by uncertain and “nonmonetary factors that affect the structure and dynamics of the job market,” which “may change over time and may not be directly measurable.” Still, in the Fed’s September 2016 Summary of Economic Projections, participants’ estimates of the longer-run normal rate of unemployment ranged from 4.5 to 5 percent and had a median value of 4.8 percent.

The 4.6 percent November print might make you think that we are indeed at full employment, but why the rate fell is also important. The slide occurred not just because of new workers finding jobs, there were also 226,000 people dropping out of the labor force. That amount surprised economists, who mostly told me, “let’s see what the coming months bring, before we come up with a reason behind the change.”

Meanwhile, the broader measure of unemployment (U-6), which includes part-timers who can’t find full-time work and discouraged jobseekers, who have given up looking for work, fell to 9.3 percent, a rate not seen since April 2008. The broad rate averaged 8.3 percent in the two years before the recession.

Besides the surprising decrease in the labor force, the other disappointment in November was the tenth of a percent slide in average hourly earnings, after a sharp rise in the prior month. Still, earnings were up at a 2.5 percent annual rate (compared with 2.8 percent in October), a decent clip with inflation remaining low.

This was the last important piece of data before the Fed’s last policy meeting of the year. While it was not sterling, it was certainly good enough to justify increasing rates by a quarter of a percent. Whether or not the central bankers will explicitly change their notion of full employment remains to be seen.

MARKETS: Investors took a breather from the post-election stock rally. Crude oil shot up over 12 percent on the week, after OPEC agreed to cut production in 2017.

  • DJIA: 19,170, up 0.1% on week, up 10% YTD
  • S&P 500: 2191, down 1% on week, up 7.2% YTD
  • NASDAQ: 5255, down 2.7% on week, up 5% YTD
  • Russell 2000: 1347, down 2.5% on week, up 15.7% YTD
  • 10-Year Treasury yield: 2.39% (from 2.36% week ago, yields hit a 17-month high of 2.44% on Thurs)
  • January Crude: $51.68, up 12.2% on week, largest gain since Jan 2009
  • February Gold: $1,177.80, down 0.3%
  • AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.12 wk ago, $2.05 a year ago)


Sun 12/4: Italian Referendum: Voters will determine whether or not to change some aspects of the Italian constitution. (For more, see analysis by E.P. LiCursi at the New Yorker.) A no vote could unseat the current Prime Minister Matteo Renzi and potentially impact the weak Italian banking system and even Italy’s membership in the EU, often referred to as “Quitaly”.

Mon 12/5:

10:00 ISM Non-Manufacturing

Tues 12/6:

8:30 Q3 Revised Productivity and Costs

8:30 International Trade

Weds 12/7:

10:00 Job Openings and Labor Turnover Survey

3:00 Consumer Credit

Thurs 12/8

Friday 12/9

10:00 University of Michigan Consumer Sentiment