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Most likely milestones in 2020
admin | December 20, 2019
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. This material does not constitute research.
The consensus for the economy in 2020 is largely bland with growth very near to trend, inflation expected to tick up slightly but remain below 2% and the Fed on hold for most or all of the year. But the most likely candidate for a blockbuster newspaper headline in 2020: the unemployment rate eclipsing the late-1960s low and reaching its lowest reading since the early 1950s.
Unemployment rate still falling
The FOMC economic projections released earlier this month and the consensus of private forecasters both assume that the unemployment rate has more or less already put in its low for the cycle. The FOMC median projection calls for the unemployment rate to average 3.5% in the fourth quarter of 2020, in line with the November 2019 reading, and to rise gradually from there, while the latest Blue Chip Economic survey has a median expectation of 3.7% for the unemployment rate next year.
It is not at all clear, however, that the unemployment rate has found a bottom. From December 2018 through November 2019, the jobless rate dropped by 32 bp, which is actually a slight acceleration from the 24 bp decline in 2018. For the unemployment rate to level off, as generally expected, something will have to change.
Labor force participation is a wild card
The 24 bp decline for the unemployment rate in 2018 was the smallest annual fall in this economic expansion, spanning a decade, but the moderation did not reflect economic weakness. In fact, the pace of job growth actually accelerated noticeably in 2018. At the same time, the labor force expanded at close to double the clip seen in prior years. In other words, firms were mostly hiring by drawing people off of the sidelines rather than scooping up those who had already been actively looking for work. In 2019, even as the pace of net hiring cooled, the unemployment rate fell slightly faster because labor force expansion moderated back to closer to the pre-2018 norm.
With the employment-to-population ratio and the labor force participation rate rising, the labor market has gotten increasingly tight. The prime-age (25-54) labor force participation rate advanced to 82.9% in November, the highest reading in 10 years and within a few tenths of the levels seen in the years prior to the Financial Crisis. Businesses are complaining that they are having great difficulty finding qualified candidates to fill openings, as evidenced by the fact that the number of job openings exceeds the number of unemployed. The likelihood that a sharp pickup in labor force participation will bail us out and limit any drop in the unemployment rate in 2020 strikes me as low.
Plumbing new depths
The only way the consensus call of a flattening out in the jobless rate in 2020 is likely to be right is if job growth slows dramatically. In the absence of that, joblessness should continue to gradually fall. Even with a modest cooling in the pace of job gains, the unemployment rate looks likely to decline by another 20 bp or so in 2020.
Such a drop does not sound like much, but we are on the cusp of historical levels. The current setting is already the lowest in 50 years, but it is also worth noting that the late-1960s nadir was 3.4%. If the unemployment rate manages to decline to 3.3% at some point next year, it would be the lowest reading since the 1951-to-1953 period, when the Korean War led to the deployment of over 300,000 American troops. In fact, the last three times that the unemployment rate slid below 3½% were all during war-time deployments: World War Two (1940s), the Korean War (early 1950s), and Vietnam (late 1960s).
A reading of 3.3% or lower for the unemployment rate would not only be the lowest reading in over 65 years. It would also be the lowest unemployment rate in peacetime since the Roaring 1920s, a development that would certainly qualify as an auspicious milestone.
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