Will the Decreasing Unemployment Rate Allow the Fed to Raise Rates?

The July 2 release of the U.S. employment numbers show that the published unemployment rate hit a seven year low at 5.3%.  New jobs created were 223,000.  The Federal Reserve Bank tends to attempt to balance full employment, which is usually defined around 5% or less with keeping inflation inside their target range.  When full employment is reached, some economists believe that this will begin to push wages higher, causing inflation.  The Fed would step in to cool off the economy by raising interest rates or contracting the money supply.

But does these employment numbers mean the economy is improving?  The answer is there is weakness in the employment situation once you drill down into the numbers.  First, I noted that new jobs for April and May were adjusted down from their initial estimates, so the previous months’ numbers are not as rosy as initially reported.

The big driver for the decrease in the unemployment rate in June was that nearly 640,000 people left the labor force.  The Commerce Department’s measure of unemployment which is commonly published is called “U-3”.  Once one leaves the workforce, they are taken off the numerator of unemployed and the denominator of those that are in the workforce.  This will tend to drop the unemployment rate.  Now it is also probably safe to assume that more people gave up on finding a job than those who retired with their gold watch.

A better measure of unemployment is what the Commerce Department calls “U-6”.  It counts unemployed, those marginally attracted to the workforce, and those who are employed part time but really want a full time job.  This number is divided by the workforce.   In June 2015, it rose slightly to 10.5%.  Now here if someone dropped completely from the work force, they are out of the ratio.  But this captures more of those who cannot find a job that will employ them full time.

Another measure to look at is the labor force participation rate.  In June, it fell to the lowest level since October 1977 at 62.6%, the time when the disco version of Star Wars topped the charts and the big box office was George Burns in Oh, God!  At this time, over 90 million Americans are not part of the labor force.  That puts extra strain on those who are in the labor force for any benefits they receive from the taxes on those who work.

The Commerce Department also reported wage growth as flat.  Average hourly earnings have remained virtually unchanged from the previous period.  So it appears there is no real wage inflation that is pressing at the moment either from wage growth statistics or from high demand for jobs.  When this is coupled with the current sovereign debt crisis in Greece, the free fall in the Chinese stock market, and the general slowing down in the world economy, it would appear there may be fewer reasons for a tightening monetary policy.