Unemployment Rate - Good News, Bad News?
The most recent unemployment announcement last week informed us that the rate increased to 3.7%, which was up from 3.5%. 3.7% showed us a relatively small incremental increase of this economic statistic and is still 2 percent lower than the current 10 year average (2013-YTD 2022 = 5.7%). This is important to recognize when thinking about Fed Policy and the current health of our economy.
The chart above illustrates the historical unemployment rate for the months of October through March going back to 1948. This was created using historical unemployment numbers from the Department of Labor. We can see from the chart that Q4 and Q1 unemployment rates in the United States have gotten higher than 10% at times but have mostly been within 4-6% during these two quarters.
Why is this number important to follow for the Fed?
The Fed has indicated that the healthy state of labor markets show that any economic slowdown may not have the staying power needed to keep inflation down as people can still easily obtain new work or receive higher pay somewhere else without disrupting how much they spend. Simultaneously, the Fed does not want to raise rates too high and push us into a deep recession.
The Fed is tightening the money supply by raising rates and reducing the balance sheet in order to deal with inflation rates that have averaged 8.3% this year in 2022. Typically, healthy inflation is somewhere between 3-5%. An 8.3% inflation rate is even higher than historical inflation for college tuition (about 6% annually) . . . which should help put this into context with what high inflation rates can mean. 8.3% is too high for most consumers.
Over the course of the third quarter, we saw profit margins for companies beginning to narrow significantly as costs began to outgrow sales revenues for many companies and some of them have announced layoffs. This means that consumer demand has not been as strong, which should hopefully help to curb high inflation. Q4 2022 earnings most likely will continue to show declines but certain sectors are still doing well with a few companies posting stronger earnings in Q3 2022.
Investors are still hoping that the Fed may either pivot their policies towards easing again, or to at least taper back their tightening efforts.
Does this unemployment rate warrant a pivot?
Realistically, the Fed pivoting their policy from tightening to easing again is unlikely until inflation reaches 2% (2% taken from their last meeting November 1st-2nd) with maximum employment. The conclusion, unfortunately, is that based on past unemployment numbers and current fed policies the 3.7% unemployment number is not very high and should be expected to get higher before there is any easing. This could change in the future, as new inflation numbers are announced or Fed policy changes, which is possible. Lastly, the Fed remains flexible with the current pace of rate hikes (75bps) and could slow these down in order to see things develop before overtightening, but this does not mean a change from tightening to easing.