Monday, January 01, 2018

Question #3 for 2018: What will the unemployment rate be in December 2018?

by Bill McBride on 1/01/2018 08:09:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2018. I'm adding some thoughts, and maybe some predictions for each question.

3) Unemployment Rate: The unemployment rate was at 4.1% in November, down 0.5 percentage points year-over-year.  Currently the FOMC is forecasting the unemployment rate will be in the 3.7% to 4.0% range in Q4 2018.  What will the unemployment rate be in December 2018?

This first graph shows the unemployment rate since 1960.

The unemployment rate has declined steadily after peaking at 10% following the great recession.

unemployment rateClick on graph for larger image.

The current unemployment rate (4.1%) is below the low for the previous cycle (4.4%), and close to the low (3.8%) at the end of the '90s expansion.

As I've mentioned before, current demographics share some similarities to the '60s, and the unemployment rate bottomed at 3.4% in the '60s - and we might see the unemployment rate that low again this cycle.  If we look further back in time, the unemployment rate was as low as 2.5% in the 1950s.

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate.

On participation: We can be pretty certain that the participation rate will decline over the next decade or longer based on demographic trends.  However, over the last several years, the participation rate has been fairly steady as the strong labor market offset the long term trend.

Participation rateHere is a graph of the overall participation rate since 1960. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

The participation increased significantly starting in the late 60s as the Boomer generation entered the workforce and women participated at a much higher rate.

Since 2000, the participation rate has generally declined, mostly due to demographics.

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
200964.6% -1.29.9%
201064.3% -0.39.3%
201164.0% -0.38.5%
201263.7% -0.37.9%
12017 is for November 2017.

Depending on the estimate for the participation rate and job growth (next question), it appears the unemployment rate will decline into the high 3's by December 2018 from the current 4.1%.   My guess is based on the participation rate declining about 0.2 percentage points in 2018, and for decent job growth in 2018, but less than in 2017.

Here are the Ten Economic Questions for 2018 and a few predictions:

Question #1 for 2018: How much will the economy grow in 2018?
Question #2 for 2018: Will job creation slow further in 2018?
Question #3 for 2018: What will the unemployment rate be in December 2018?
Question #4 for 2018: Will the core inflation rate rise in 2018? Will too much inflation be a concern in 2018?
Question #5 for 2018: Will the Fed raise rates in 2018, and if so, by how much?
Question #6 for 2018: How much will wages increase in 2018?
Question #7 for 2018: How much will Residential Investment increase?
Question #8 for 2018: What will happen with house prices in 2018?
Question #9 for 2018: Will housing inventory increase or decrease in 2018?
Question #10 for 2018: Will the New Tax Law impact Home Sales, Inventory, and Price Growth in Certain States?