Unemployment Rate at 50 Year Low: Why it Matters

By Modern Wealth Management

October 14, 2019

Unemployment Rate at 50 Year Low: Why it Matters

On October 4th the Bureau of Labor Statistics released its monthly Employment Situation Report. The data showed the Unemployment Rate in the US had fallen to 3.5%, a low not seen since December of 1969. That is excellent news for our economy, as it means there’s plenty of work to go around. The report also showed the Labor Force Participation Rate held steady at 63.2% overall, and at 82.6% for adults aged 25-54. Another good sign for the economy was the Employment to Population Ratio continued its upward climb. See the charts below, which we built on FRED, the St. Louis Fed’s charting and data site.

Unemployment at 50 Year Low - Unemployment 1950 to 2019

Unemployment at 50 Year Low - Unemployment and Labor Participation
Unemployment at 50 Year Low - Unemployment and Employment Population Ratio

Unemployment Claims At or Below 300,000 for 239 Consecutive Weeks

Additional good news came from the Department of Labor showing initial Unemployment claims have remained at, or below 300,000 for 239 consecutive weeks. That’s the longest streak since 1967, and the labor force has more than doubled since then. According to the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, there were 7.2 million job openings as of the last day of July, (which is the latest data available) 1.1 million more jobs than the number of Unemployed people.

Unemployment Rate and Education Levels

The Employment Situation Report also showed some excellent news for those without a Bachelor’s degree. Their unemployment rate has fallen substantially faster than those who have a Bachelor’s degree. Those people were likely to have fallen out of the labor force after the Great Recession and had a harder time re-entering when things improved. Today though, the most significant percentage of people entering employment came not from the currently unemployed but those outside of the labor force. Those outside the labor force aren’t counted in the headline U-3 Unemployment number; you have to look at the U-6 to find them. But they’re reappearing in droves, making up 73.7 % of the workers entering employment in the third quarter.

Unemployment at 50 Year Low - Unemployment and Education
Unemployment at 50 Year Low - Workers Rejoining Workforce

Unemployment Rate and Economic Expansion

This is all great current economic news. And it should mean the continuation of the economic expansion that has now been in place for ten years and counting. It’s difficult to say how long the expansion can continue, given that there’s no historical precedent. We are currently in the most prolonged period of economic expansion in our history. However, one thing history does show is that economic expansions don’t last in perpetuity. They will, eventually, come to an end. So let’s go back to the first chart we looked at because there are some things there to be aware of. Look at the red arrows preceding the shaded areas. Those shaded areas are US Recessions, and almost all of them are preceded by meager unemployment rates. The reason is that extremely low unemployment rates generally occur in the later stages of economic expansions.

Unemployment at 50 Year Low - Unemployment End of Economic Expansion

So while we should celebrate the historically low unemployment rates we’re experiencing today, we should also realize that, like all things, this too will likely pass.

The Unemployment Rate and the Future

Hopefully, we have several months to a few years, left in this great economic cycle we’re in. The US economy is strong, and I believe there is some room left to grow. We are facing geopolitical tensions that are making the US stock market volatile, but they haven’t bled into the underlying economy to date. A trade deal with China will be helpful and give business and the markets the one thing they crave…certainty. That certainty will lead to further expansions in both our economy and China’s, which will lead to additional job openings here and increasing our Employment to Population ratio further. That all becomes a virtuous cycle that can continue for a good while.

Let’s hope that happens. In the meantime, we’ll continue to enjoy our good economic news, while keeping an eye on the underlying data for signs of the need for strategy changes.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.