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ChartBrief 126 - A tight US labor market

August 4, 2017

The July jobs report had the US unemployment rate dropping back to 4.3%, which is slightly lower than the trough in 2007, and comfortably below the NAIRU - a key indication of an increasingly tight labor market.  Aside from the low absolute and relative level of the unemployment rate, the conference board consumer confidence and NFIB small business confidence surveys both confirm the US labor market looks very healthy: the details in the data show that consumers are increasingly saying jobs are easy to find, and small businesses that jobs are hard to fill. So it's pretty clear that the US labor market is in the later-cycle tight phase, with spare capacity all but used up.

 

Now for the so-what.  The main implication is that it should be business as usual for the Fed as its monetary policy normalization process is now well underway.  The jobs market matters because it is a direct target of the Fed (full employment) and an indirect target in that a tighter labor market will lead to higher wage inflation which should also express in higher generalized inflation.  So a base case for the Fed to commence balance sheet normalization (i.e. passive quantitative tightening) from September looks good. For now it's a slow process, I'd expect balance sheet normalization to begin soon and perhaps 1-2 more rate hikes this year.  At the margin this increases risks to both bonds and growth assets.

 

The US unemployment rate has moved clearly below the NAIRU (Non Accelerating Inflation Rate of Unemployment) - a key indication of a tight labor market.

 

If the official statistics weren't enough, here's confirmation from the consumer and small business confidence surveys that the US labor market is looking very healthy (consumers say it's easy to find jobs, small businesses say it's hard to fill jobs).

 

 

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