Sunday, January 10, 2016

Question #3 for 2016: What will the unemployment rate be in December 2016?

by Bill McBride on 1/10/2016 11:09:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2016. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2015.

3) Unemployment Rate: The unemployment rate was at 5.0% in November, down 0.8 percentage points year-over-year. [CR Note: The unemployment rate was also at 5.0% in December]. Currently the FOMC is forecasting the unemployment rate will be in the 4.6% to 4.8% range in Q4 2016. What will the unemployment rate be in December 2016?

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 2015, I expected the participation rate to stabilize as the labor market improved.  Last year I wrote:

My guess is based on the participation rate staying relatively steady in 2015 - before declining again over the next decade.
And the participation rate declined only slightly last year from 62.7% in December 2014, to 62.6% in December 2015. The long term down trend was offset by some people returning to the labor force in 2015.

For 2016, I expect more of the same - probably another small decline in the participation rate.

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% -0.39.3%
201164.0% -0.38.5%
201263.7% -0.37.9%
201362.9%-0.86.7%
201462.7%-0.25.6%
201562.6%-0.15.0%

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline to around 4.5% by December 2016.   My guess is based on the participation rate declining slightly in 2016 and for decent job growth in 2016 (however less in 2016 than in 2015).

Here are the Ten Economic Questions for 2016 and a few predictions:

Question #1 for 2016: How much will the economy grow in 2016?
Question #2 for 2016: How many payroll jobs will be added in 2016?
Question #3 for 2016: What will the unemployment rate be in December 2016?
Question #4 for 2016: Will the core inflation rate rise in 2016? Will too much inflation be a concern in 2016?
Question #5 for 2016: Will the Fed raise rates in 2016, and if so, by how much?
Question #6 for 2016: Will real wages increase in 2016?
Question #7 for 2016: What about oil prices in 2016?
Question #8 for 2016: How much will Residential Investment increase?
Question #9 for 2016: What will happen with house prices in 2016?
Question #10 for 2016: How much will housing inventory increase in 2016?