News

In May the unemployment rate in the US reached its lowest level since September 2008 at 6.3%. Unemployment has fallen rapidly since peaking at 10% in the aftermath of the financial crisis towards the end of 2009. Janet Yellen, Chair of the Federal Reserve Board (The Fed) has estimated that full employment for the economy is when the unemployment rate is between 5.2 to 5.6%.

At the current rate of reduction and pace of economic growth it is expected to fall below 6% by early next year and break through this ‘full employment’ level within 12 months. This seems quite quick in the context of below trend Gross Domestic Product (GDP) growth the economy is currently experiencing. The Fed has consistently argued that the number of potential job seekers actively looking for jobs has fallen as a result of the weak economy and will therefore rise again as employment conditions improve and finding jobs becomes easier.

There have been few signs of this happening, however. The participation rate peaked at the turn of the millennium with 67.3% of the US population actively participating in the labour market (working or looking for work). This then fell gently over several years to just over 66% at the onset of the financial crisis in 2007, since when it has fallen more sharply, to just 62.8% in May.

We think it is more likely that the fall in the participation rate is structural and a function of an ageing population. Consequently, we believe inflationary pressure from the labour market will rise. Whilst this will be good for consumer confidence and consumption it may also lead to earlier interest rate rises. Alternatively, the Fed may stick by their guns and ignore the pressure for the time being in the pursuit of reducing long term unemployment. This means they have to be right about an increasing participation rate or run the risk of even higher inflation.