The economy will continue to improve, as long as policymakers don’t thwart its progress
President Trump has recently claimed that he inherited an economic “mess,” calling the American economy a “disaster.” From a broad macroeconomic perspective, this is simply untrue. The overall unemployment rate has been steadily falling and is essentially back to where it was immediately before the Great Recession started. Recent years have even seen improvements in labor force participation as the labor market continues to firm up. And while other measures, such as the prime-age employment-to-population ratio and nominal wage growth, continue to lag, they have still shown continued improvement over the last several years. To be clear, the economy is still weak and still hasn’t reached genuine full employment like it did in the late 1990s and early 2000s. Many workers and their families are still struggling, and the lower unemployment rate is only now beginning to translate into broad-based wage growth. But the economy is on track to recover, and there are no obvious signs of any underlying weakness that would lead to a recession in the near term. Inheriting a “mess” would accurately describe what President Obama was handed in January 2009—with the economy having lost 3.4 million jobs just in the previous six months and with unemployment having risen 3.4 percentage points over the previous 18 months. President Trump has clearly inherited something quite different—a stable albeit too-slow recovery that is on extremely firm ground.
It’s important to keep this steady improvement in mind as we assess economic progress moving forward. No policymaker should be allowed to claim credit for improvements that are simply a continuation of a trend. To that point, I’m going to lay out some key labor market indicators, discuss their recent trends, and assess their likely progress over the next two years.
Let’s begin with the unemployment rate. Over the last eight years or so, the unemployment rate has fallen from a high of 10.0 percent down to 4.7 percent in February. While initially it fell rather sharply, the pace of decline has slowed—but this is partly because healthier labor markets have drawn in discouraged workers and boosted labor force participation. Over this past year the economy has continued to add jobs faster than working-age population growth, meaning that workers idled by the Great Recession and slow recovery are still being absorbed. The average unemployment rate over the three months prior to President’s Trump first jobs report was 4.7 percent, a fall of 0.3 percentage points from the average rate from the same three months the previous year (5.0 percent). At this speed, the unemployment rate would hit 4.0 percent sometime in 2019. This is not an unrealistic aspiration. The U.S. economy sat at roughly 4.0 percent for two solid years in 1999 and 2000, and policymakers should be aiming for continued downward pressure on unemployment from today. Failure to deliver even lower unemployment in the coming years should be seen as a policy mistake—either by the Federal Reserve or by fiscal policymakers. Conversely, we should expect to see this slow-but-steady progress continue, and President Trump deserves kudos only if the economy sees a noticeable pickup in labor market performance relative to this pre-existing trend.
Unemployment rate, 2007–2019
|Date||Actual||Autopilot projection||CBO projection||Target|
Source: EPI analysis of Bureau of Labor Statistics' Current Population Survey public data
EPI’s new Autopilot Economy Tracker highlights recent trends in the unemployment rate and other labor market indicators, and shows where these indicators will be in a few years if these trends continue—i.e., if the economy were on autopilot. For example, the economy has seen steady improvements in the share of the prime-age population with a job (EPOP) since it bottomed out at 74.8 percent about seven years ago. Improvement in this measure has been slower than for the unemployment rate, but it, too, is improving. Currently at 78.3 percent, the prime-age EPOP has finally surpassed the lowest point of the two previous business cycles, and has slowly but consistently been rising with the growing economy. As the economy continues its march towards full employment, more and more Americans will be drawn back into the labor force, and great numbers of them will likely find employment. Barring any changes in recent trends (which would most likely occur due to policy changes), the share of the prime-age population with a job would continue to trend up. At the current pace experienced over the last year it would reach the historical high benchmark of 81.6 percent set in late 1999 and early 2000 by 2022.
In the last year, falling unemployment has finally translated into a slight pick-up in the pace of wage growth. In February, nominal hourly pay growth was 2.8 percent. President Trump inherited a rate of nominal hourly pay growth that averaged 2.6 percent in the 12 months ending in January—a 0.3 percentage point increase over the growth rate of the previous 12 months. If that trend continues, nominal wage growth may finally get within spitting distance of 3.5 to 4.0 percent, a growth rate consistent with the Fed’s 2 percent inflation target, 1.5 percent productivity growth, and a stable labor share of income. (We need to see consistent wage growth in this range before there is a hint of upward pressure on prices stemming from too-tight labor markets. Thus, the Fed should not even consider raising interest rates to forestall inflation until wage growth is consistently meets this standard.)
In this initial release, this tool also tracks payroll employment. There, we rely on two projections: the CBO, and President Trump’s own prediction that his policies will create 25 million jobs in the next 10 years. The CBO projection is arguably excessively conservative, exhibiting a slowdown in job growth before the economy has achieved genuine full employment. While we have noted previously how unrealistic the Trump projection is for the next 10 years, adding 2.5 million jobs a year for the next couple of years is not completely implausible. If it continued for the next four years, this pace of job growth would only lead to (age-adjusted) EPOPs that were historically high by 2021.
This morning’s jobs report, which showed the economy added 235,000 jobs, was welcome news—but as our new tracker makes clear, it was not unexpected news. Put in perspective, job growth was 238,000 in January 2017, and 237,000 a year ago. The economic trends are clear. Policymakers deserve credit if the economy outperforms these trends, and blame if it underperforms them.
In near future, we will be expanding out the dashboard to look under the hood of the top line metrics and examine trends around unemployment by race and prime-age EPOPs by gender. We will also examine more closely the wage growth of production/nonsupervisory workers, which has been stagnant for the last year, and certain subsectors of payroll employment, highlighting, for instance, depressed manufacturing in the United States.
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