How low can US unemployment go? What to watch in the June jobs report




Bloomberg News/Landov


Like a new house built rapidly from the ground up, the U.S. economy is surging in the spring. That means more jobs and maybe even better pay for workers.

Job openings and hiring are as strong as ever and unemployment has fallen to an 18-year low, but increases in worker pay haven’t kept up. Is that big payday coming?

Here’s what to watch in the employment report for June, to be issued Friday morning by the Labor Department.

Wages and labor shortages

The unemployment rate has fallen to an 18-year low of 3.8% and more and more companies complain they can’t find enough skilled workers. You’d figure that would be boosting worker pay, especially with so many people now switching jobs. Some 3.4 million Americans quit in April, almost matching a record high.

Wages have been rising, but not nearly as fast as might be expected. Hourly pay rose at a 2.7% pace in the 12 months ending May, but that’s far less than the 3% to 4% rates that usually prevail when unemployment is so low.

Economists are convinced wages will move higher, perhaps crossing the 3% barrier later this year for the first time since 2009. It just won’t happen this month. Economists estimate the yearly rate will edge up to 2.8%.

Jobs, jobs and more jobs

Sooner or later the rate of hiring simply has to slow. The U.S. has added almost 19 million new jobs since 2010, leading to a far smaller and still-shrinking pool of available labor. Many of the people looking for jobs are also either very young or lack the necessary skills.

“Businesses are having a more difficult time finding qualified workers to fill open positions,” said Bank of the West chief economist Scott Anderson.

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The expected dropoff in hiring will probably occur over a period of months, however, and economists doubt it will start in June. They predict the U.S. economy added close to 200,000 new nonfarm jobs last month.

How low can unemployment go?

Economists predict the unemployment will remain steady at 3.8% in June, but it’s widely believed the jobless rate will soon move toward 3.5% and reach levels not seen since the 1960s.

Here’s the conundrum. A low unemployment rate has long been associated with rising inflation, but prices are still relatively mild even after a sharp increase over the past year.

Worker pay tends to rise more rapidly in good times since businesses have to pay more to recruit or retain talented employees. Economists have a name for this phenomenon: They call it, uh, NAIRU.

That stands for the non-accelerating inflation rate of unemployment, but no need to remember it. The fact is, wages aren’t rising all that quickly. And the link between employment and inflation appears broken or, at the very least, in hibernation.

The unemployment rate can only go so low, however, before labor-market shortages push wages higher.

Watch the relationship between wages and unemployment very closely. If wages top 3%, the Federal Reserve is likely to raise U.S. interest rates












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 more aggressively.

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Already suffering from trade-war worries, the stock market












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 could suffer further declines if investment cash shifts to bonds from stocks.












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