Slow Economic Growth Has Led To Weak Job Growth

One factor that has turned into 'normal' for this economic recovery is its slow rate of growth. Out of the eleven recoveries since 1949, the current one is the slowest, barely averaging above 2%.

Source: The Wall Street Journal

This slow rate of growth has left a gap in potential economic output of nearly $3 billion. In percentage terms the economy's slow rate of growth has expanded 16% below its long run potential.

This missed potential output has resulted in a weak labor market where individuals have been unable to find jobs, many simply dropping out of the labor force. The increase in those not in the labor force has resulted in a decline in the participation rate. The participation rate refers to the number of individuals over the age of sixteen who are either employed or are actively looking for work compared to the overall civilian population. The latest participation rate equals 62.8%. Prior to the financial crisis, the March 2008 participation rate equaled 66.1%. This fall in the participation rate has created a gap of 8 million people that are not employed. A result of these fewer employed individuals is an increase in those not in labor force as can be seen in the below chart.

Since March 2008 the rate of growth in the 'not in labor force' category has steepened with total employment growing at a slower pace.

The factors contributing to this drop in the participation rate is not completely clear, but the monthly Bureau of Labor Statistics Job Openings and Labor Turnover report shows job openings are at their highest level in fifteen years, 5.4 million job openings. A part of the drop in the participation rate is likely attributable to a mismatch between the available jobs and the skills of job seekers.

This slower rate of GDP growth puts the Fed in a predicament as to the timing of the next Fed interest rate increase if job creation is of concern to the committee. Janet Yellen stated after the September Fed meeting that she believes the job market is returning to health due to an uptick in the participation rate. However, in a recent Fortune article, Neil Dutta, Chief Economist with Renaissance Macro Research points out, "if you look at the actual flow data showing the number of people each month entering and exiting the labor force, the rate at which workers are entering the labor force is actually lower today than at any point over the last two years." 

Source: Fortune

With the probability of a rate hike in November at less than 10% and odds just under 70% in December, the market seems to be expecting a rate increase before the end of the year. Although a 25 basis point rate increase from this low level of interest rates likely does not cause an economic shock, the current slow pace of economic growth is a factor that needs to be considered.

A quickening pace of GDP growth does not seem on the horizon either. The Atlanta Federal Reserve uses data to create a more current estimate of GDP growth called GDPNow and last week they lowered their third quarter forecast down to 1.9% from a prior estimate of 2.1%.

Source: Federal Reserve Bank of Atlanta

In conclusion, with the economy seeming to continue to grow at only a snails pace and a labor market that is really not overheating, a Fed rate increase before year end would likely not contribute to improve the pace of hiring.