admin | October 12, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The U.S. unemployment rate sank in September to 3.7%. It is impressive enough to note that this is the lowest level of joblessness in nearly 50 years, but the reality is even more dramatic. In peacetime, the unemployment rate has not been lower than the current setting in almost 100 years.
A new cycle low
In the September employment report, the unemployment rate surprisingly posted a dramatic fall from 3.9% to 3.7%. That reading was marginally lower than the May 2018 and April 2000 lows of 3.8%. The last time that the unemployment rate was lower was the late 1960s (Exhibit 1).
Exhibit 1: Unemployment rate
Life during wartime
As Exhibit 1 shows, the only times that the unemployment rate has been lower than the current level over the past 70 years (the entire history of the series) were in the early 1950s and in the late 1960s. U.S. history aficionados will quickly note that each of those episodes were periods of war. In the late 1960s,
the U.S. had deployed over half a million troops to Vietnam (and close to three-quarters of a million in total in East Asia). In a hypothetical where there was no war, if even 100,000 of those men were unemployed (or if their employment displaced that many others from jobs), the jobless rate would have been above 4% instead of in the mid-3%’s. In any case, that era is well known in economic history as the Guns and Butter period, when the federal government spent heavily both domestically and on the military, which, with the help of persistently easy monetary policy, helped to generate a sharp acceleration in inflation. The CPI accelerated from below 3% through most of 1967 to 6% by the end of 1969.
Going back further, the unemployment rate dropped below 3% in the early 1950s. Again, this coincided with the height of the Korean War, when the U.S. sent over 300,000 troops to Korea and over half a million to all of East Asia. To put that into perspective, the civilian labor force in the early 1950s was less than 20 million, so that the 300,000 potential workers taken out of the job market represented at that time close to 1.5% of the civilian labor force (we cannot say much about inflation pressures in that period because, as it had during World War Two, the federal government imposed wartime price controls in support of the war effort).
While the monthly unemployment series as we know it only began in 1948, there are other data going even further back in the nation’s history. Annual readings are available going back to 1900 in the Census Bureau’s compendium of historical statistics (Exhibit 2).
Exhibit 2: Unemployment rate 1900 to 1947
Source: Census Bureau
Not surprisingly, the unemployment rate was lowest during the two World Wars (1914-1918 and 1941-1945). The last peacetime period when the unemployment rate was as low as it is today is the mid-to-late 1920s. While the economy was so different nearly 100 years ago that it is difficult to even begin to make comparisons, to tie the current environment to the 1920s is hardly a reassuring thought given how the “Roaring 20s” ultimately ended.
Where to next?
Notwithstanding the rhetoric over the past week from President Trump, the most striking aspect of the current episode is that the unemployment rate has already dropped to a nearly 50-year low while Fed policy remains well to the accommodative side of neutral. The FOMC estimates that the long-run neutral setting for the funds rate is about 3%, a level that “gradual” rate hikes will not reach before mid-2019 (at the earliest). In light of the lags associated with monetary policy, it is quite possible that, if the economy is not hit by any major shocks, the unemployment rate could continue to decline for another 18 months or more. Indeed, I would not be surprised to see the unemployment rate fall into the low 3%’s by 2020. Surveys and anecdotes already suggest that the labor market is extremely tight, with job openings approaching 7 million (a million higher than the ranks of the unemployed), firms complaining of a lack of qualified job candidates, and help wanted signs ubiquitous. Labor market conditions could get really interesting over the next year or two.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.