Wednesday, January 01, 2014

Question #3 for 2014: What will the unemployment rate be in December 2014?

by Bill McBride on 1/01/2014 04:35:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014.

Here is a review of the Ten Economic Questions for 2013.

3) Unemployment Rate: The unemployment rate is still elevated at 7.0% in November. For the last three years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline. Maybe 2014 will be the year the participation rate increases a little, or at least stabilizes. What will the unemployment rate be in December 2014?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

Policy matters in 2014 too.  The Emergency Unemployment Compensation (EUC) benefits expired on December 28, 2013. With the very high level of long term unemployed, not extending EUC is unprecedented, bad economics and ... well, cruel. So maybe Congress will pass an extension. This matters for the unemployment rate - if there is no extension, the unemployment rate will probably decline 0.2 to 0.3 percentage points in the first quarter just due to people dropping out of the labor force (or taking minimum wage jobs to survive).   I'd guess Congress will be shamed into taking action, but you never know.

And on participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is uncertain what will happen in 2014.   The participation rate could bounce back or at least stabilize. Or the participation rate could decline further as has happened over the last few years.

Unemployment and Participation Rate for December each Year
December ofParticipation RateDecline in Participation Rate (percentage points)Unemployment Rate
200865.8% 7.3%
200964.6% 1.29.9%
201064.3% 0.39.3%
201164.0% 0.38.5%
201263.6% 0.47.8%
2013163.0%0.67.0%
1This is the November 2013 participation and unemployment rate.

My guess is the participation rate will stabilize or only decline slightly in 2014 (less than in 2012 and 2013), unless the EUC isn't extended.  Without an extension of the EUC, we might see a 0.3 to 0.5 percentage decline in the participation rate in 2014.

Even if the participation rate stabilizes, the unemployment rate will probably decline for the right reason in 2014; a pickup in job growth.

Depending on the estimate for job growth (next question), it appears the unemployment rate will decline to the low-to-mid 6% range by December 2014.

Here are the ten questions for 2014 and a few predictions:
Question #1 for 2014: How much will the economy grow in 2014?
Question #2 for 2014: How many payroll jobs will be added in 2014?
Question #3 for 2014: What will the unemployment rate be in December 2014?
Question #4 for 2014: Will too much inflation be a concern in 2014?
Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
Question #6 for 2014: How much will Residential Investment increase?
Question #7 for 2014: What will happen with house prices in 2014?
Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
Question #9 for 2014: How much will housing inventory increase in 2014?
Question #10 for 2014: Downside Risks