The Economy May Not Be At Full Employment

One economic conundrum has been the sub-par growth rate in average hourly earnings in spite of what appears to be an economy operating at full employment. In a fully employed economic environment, wages generally see fairly strong upside pressure and this becomes a concern with the Federal Reserve due to the upward pressure placed on the inflation rate. As the below chart does show, average hourly wages have grown at about a 2% annual rate since the end of the financial crisis. Prior to the onset of the last recession, wage growth was in the range of 3% to 4%. From a positive perspective though, wages have been growing faster than the rate of inflation for most of the last four years. Additionally, the differential wage growth and inflation in this cycle is on par with prior economic expansions.

The below chart shows the current unemployment rate is 4.3% and at a level reached prior to the 2008/2009 recession. Also included in the below chart (orange line) is the unemployment rate if the participation rate was equal to the participation rate prior to the 2008/2009 recession. The participation rate in March 2008 equaled 66.1% versus the current rate of 62.9%. At a 66.1% participation rate, the current unemployment rate would equal 9.0%. What this means in absolute terms is an additional 13 million people would be counted in the labor force, but unemployed.

Some economic strategist will say the 13 million person increase in the "not in labor force" figure is largely a result of baby boomer retirements. On the other hand, with such a low unemployment rate, one might ask why Amazon's (AMZN) recent national hiring day across twelve locations drew such long lines.

Certainly, given the reported unemployment rate of 4.3%, history would suggest wage growth should be more in the 4% range. However, if the participation should be higher and nearer the pre-financial crisis level, maybe the real unemployment rate is closer to 9% than the reported 4.3% rate and the current wage growth rate is in line with historical figures.

Interestingly, in a wage growth report released earlier this week by the San Francisco Federal Reserve Bank, references were made to workers being pulled back into the labor force. Also noted in the report was the fact newer job entrants put downward pressure on wage growth to the tune of about 2%.

And finally, I continue to evaluate the participation rate of the various employment age groups and the only group showing a participation rate higher than the pre-financial crisis participation rate is the 55 and over group. As the below chart shows, all other groups continue to show slack from a participation rate perspective.

In our view the unemployment rate is likely higher than the reported 4.3% given real demand examples like the Amazon National Hiring Day. Positively, wages are growing faster than inflation; however, the employment market is likely not as strong as it could be. However, this suggests additional employment growth can occur and provide further tailwind for economic growth going forward.