Tuesday, December 30, 2014

Question #3 for 2015: What will the unemployment rate be in December 2015?

by Bill McBride on 12/30/2014 04:51:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

3) Unemployment Rate: The unemployment rate was at 5.8% in November, down 0.9 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 5.2% to 5.3% range next December.  What will the unemployment rate be in December 2015?

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.

On participation: We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends.  In 2014, I expected the participation rate to stabilize or decline slightly as the labor market improved - the long term down trend was offset by some people returning to the labor force.  It is possible that the participation rate could even increase a little in 2015 before resuming the downtrend.  If the participation rate increases a little (say to 63%) then the unemployment rate will be a little higher next December.

Here is a table of the participation rate and unemployment rate since 2008.

Unemployment and Participation Rate for December each Year
December ofParticipation RateChange in Participation Rate (percentage points)Unemployment Rate
200865.8%7.3%
200964.6% -1.29.9%
201064.3% -0.39.4%
201164.0% -0.38.5%
201263.6% -0.47.9%
201362.8%-0.86.7%
2014162.8%0.05.8%
1This is the November 2014 participation and unemployment rate.

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to close to 5% by December 2015.   My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade. If the participation rate increases a little, then I'd expect unemployment in the low-to-mid 5% range.

Here are the ten questions for 2015 and a few predictions:
Question #2 for 2015: How many payroll jobs will be added in 2015?
Question #3 for 2015: What will the unemployment rate be in December 2015?
Question #4 for 2015: Will too much inflation be a concern in 2015?
Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
Question #6 for 2015: Will real wages increase in 2015?
Question #7 for 2015: What about oil prices in 2015?
Question #8 for 2015: How much will Residential Investment increase?
Question #9 for 2015: What will happen with house prices in 2015?
Question #10 for 2015: How much will housing inventory increase in 2015?