The national unemployment rate dipped to 3.5 percent in July, according to the latest data from the Bureau of Labor Statistics, once again hitting more than 50-year lows.
It’s still peak employment as far as the eye can see. Even with the past two years’ high inflation dropping dramatically and disinflation usually correlating with higher unemployment and a recession, that simply has not occurred yet, despite all the warning signs typically associated with an economic slowdown or downturn.
To see why, one must consider the very real labor shortages we have been experiencing.
Job openings measured by the Bureau of Labor Statistics remain highly elevated at 9.6 million. Incredibly, that’s down more than 20 percent below the 12 million peak in March 2022. Although a recent addition to the BLS plethora of data, job openings in the past three recessions have tended to dip significantly, as now.
However, the number of Americans retiring has steadily increased over the past decade, and so have the number of job openings. Americans not in the labor force 65 years old and older has increased 3.36 million since Feb. 2020, from 28.3 million to 31.6 million today.
In Jan. 2009, seniors not in the labor force were just 20.1 million. That’s the Baby Boomer retirement wave, coupled with comparatively lower fertility rates as more women have entered the workforce in greater numbers in subsequent generations.
It is a situation similar to Japan’s demographic decline the past few decades with when a rapidly aging population followed very low fertility rates. During the financial crisis and Great Recession of 2008 and 2009, the unemployment rate only reached 5.7 percent (here it reached 10 percent in Oct. 2009), and just 3.2 percent during the Covid recession.
In other words, Baby Boomers leaving the labor force may be absorbing what otherwise would be a significant increase in joblessness, at least for now. The question for the current cycle has been whether those job openings would be enough to forestall job losses in labor markets indefinitely or at least through a period that would have otherwise resulted in the unemployment rate steadily ticking upward. For now, that appears to be the case.
One item to still keep an eye on is the spread between 10-year treasuries and 2-year treasuries, an inversion of which usually predicts a recession on the horizon as long term growth is perceived to be lower than short term growth. The 10-year, 2-year inverted briefly in March 2022 and then succumbed fully in July 2022, where it has remained. As of now, it remains inverted at -0.72 percent. That’s up significantly from early July, when it was at -1.08 percent.
Usually, as the economy turns into a recession, the yield curve will tend to uninvert itself as the Federal Reserve ramps up purchases of treasuries and drops interest rates. The Fed hasn’t done that yet, after hiking interest rates for the past year, and has stated it will continue to hike interest rates until inflation returns to more normal levels.
Speaking at a press conference following the central bank’s rate hike on July 26, Federal Reserve Chairman Jerome Powell stated, “My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation… We have been seeing the effects of our policy tightening on demand in the most interest-rate-sensitive sectors of the economy, particularly housing and investment. It will take time, however, for the full effects of our ongoing monetary restraint to be realized, especially on inflation. In addition, the economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring, and inflation.”
Powell added a word of warning, “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”
That is, either an economic slowdown or even a recession. Unemployment is still near record lows, at 3.5 percent in July and the Federal Reserve in June projected it to rise steadily to 4.1 percent this year and up to 4.5 percent in 2024, an implied 1.3 million jobs losses between then and now, as it sees inflation continuing to cool off from its current levels. And it only sees 1 percent inflation-adjusted economic growth in 2023, 1.1 percent in 2024 and 1.8 percent in 2025.
However, those GDP estimates were from a month ago, and the minutes for the Fed’s July meeting are not yet available. Since then, the Bureau of Economic Analysis reported 2.4 percent inflation-adjusted growth in the second quarter, following a 2 percent increase in the first quarter. So, to hit just 1 percent growth for the entire year would require almost no growth or negative growth going forward.
In that case, the question of unemployment rising might simply be one of timing. But with the labor shortages, perhaps it won’t be as bad as it otherwise might have been. As usual, stay tuned.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.
