The Last Time Unemployment Got This Low, the Economy Got Weird

 

The US unemployment rate fell to 3.7 percent in September, the lowest rate since December 1969. That’s even lower than the jobless rate during the 1990s internet and productivity boom. Other bits of good news in the report include decent monthly job growth of 134,000 — probably a depressed number because of Hurricane Florence. With upward revisions to the previous two reports, job gains have averaged 190,000 per month over the past three months. Such gains are consistent with “steady declines in the unemployment rate and solid increases in aggregate household income,” according to Barclays. There was also a 0.3 percent gain in average hourly earnings, a tick higher employment rate, and a 420,000 rise in the household measure of employment easily outpaces a 150,000 rise in the labor force.

Good stuff.

But what happens next? One should hope events play out today better than after that 1969 milestone. A Federal Reserve history of the 1970s described it as a “turbulent time” for the American economy. And it sure was. The economy slipped into recession after the employment peak, one of four over the next dozen years. Meanwhile, the inflation rate that had begun creeping up in the mid-1960s would become the Great Inflation and hit 15 percent by 1979. From 1966-1982, the stock market fell more than 70 percent in real terms. By decade’s end, America was suffering a “crisis of confidence,” according to President Carter.

Not good stuff. (On Twitter I joked the “3.7 percent unemployment rate is a great omen. Last time it was that low, 1969, what came next was a decade of prosperity and economic stability as American had never before seen.” Not everyone got the joke.)

One way to avoid a repeat is making sure an independent Fed remains intolerant of sustained high levels of inflation, and that the public stays sure the central bank is willing and able to keep doing its job. That, especially at a time of big fiscal stimulus when the economy already appears within walking distance of full employment — or at least where constraints on labor supply start biting. (Longer-term, government should focus on boosting productivity, which downshifted at the start of the 1970s.) RSM economist Joseph Brusuelas cautions that the low jobless rate “is indicative of what will become a growing problem in the current expansionary cycle: there simply are not enough willing and able workers to meet demand, which will result in bottlenecks in housing, manufacturing and agricultural industrial ecosystems going forward.”

So far at least, this current Fed is taking seriously its inflation-fighting mission. Capital Economics notes that the “recent strength of the economy appears to be pushing Fed officials in an increasingly hawkish direction” and as “the boost from fiscal stimulus fades and rising borrowing costs start to weigh more heavily on rate-sensitive activity, an economic slowdown next year will force the Fed to end the current tightening cycle sooner than officials anticipate.”

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  1. Fake John/Jane Galt Coolidge
    Fake John/Jane Galt
    @FakeJohnJaneGalt

    I would take the economic numbers with a grain of salt.  Obama and crew cooked the books quite a while to make things look good.  I can’t see Trump unraveling that knot just to make himself look bad.  I suspect things are not quite as good as we are being told.

    • #1
  2. DonG Coolidge
    DonG
    @DonG

    The Fed was idiotic under LBJ.  Now the Fed is too restrictive.  There is no inflation and the strengthening dollar means the Fed should increase the money supply (preferable by reducing interest on excess reserves).  The unemployment rate is not a concern as the labor force participation rate is low.  We still have lots of people on the sidelines.  Never believe complaints by the chamber of commerce folks about a tight market.  Look at relocation data!

    • #2
  3. Unsk Member
    Unsk
    @Unsk

    James, Could you please inform your readers that the Fed has pulled over 285 billion dollars from it’s monetary reserves, and has plans to pull 50 billion a month for the next two years?   That policy move is so totally unprecedented  in our lifetime it takes your breath away unless you go all the way back to  1931. You remember what happened next back then, right?

    Talk about weird.  Fed Chairman Jerome Powell says that’s okay cuz the economy is still growing.  But, but, but, but, isn’t  there something like a 10 month lag time effect in the economy to money supply cuts?  That the US economy is still growing is simply miraculous, but how long it was will last is an open question.  Cracks are already showing in real estate values and construction. Of course, his cuts have raised havoc around the world cuz 40% of the dollar reserves are outside the US of A and many of  the  loans to the “emerging markets” are dominated in dollars, effectively raising rates and raising loan valuation amounts at the same time.  Ouch! Big Ouch!

    I know Chairman Jerome is trying to get us back to a working market economy, but he might want to be careful. 

    • #3
  4. David Foster Member
    David Foster
    @DavidFoster

    Seems like one needs to consider the labor force participation rate as well as the unemployment rate.  There are, for example, quite a few people spending their time pursuing educational programs of questionable value because they haven’t seen anything they like on the job market, and lots of other categories of people who could be added to the workforce.

    Maybe some smart economist could develop an indicator which combines the unemployment rate and the labor force participation rate (stratified by reason for not participating) to develop a combined and more *real* unemployment rate.

    • #4
  5. OccupantCDN Coolidge
    OccupantCDN
    @OccupantCDN

    Unsk (View Comment):

    James, Could you please inform your readers that the Fed has pulled over 285 billion dollars from it’s monetary reserves, and has plans to pull 50 billion a month for the next two years? That policy move is so totally unprecedented in our lifetime it takes your breath away unless you go all the way back to 1931. You remember what happened next back then, right?

    Talk about weird. Fed Chairman Jerome Powell says that’s okay cuz the economy is still growing. But, but, but, but, isn’t there something like a 10 month lag time effect in the economy to money supply cuts? That the US economy is still growing is simply miraculous, but how long it was will last is an open question. Cracks are already showing in real estate values and construction. Of course, his cuts have raised havoc around the world cuz 40% of the dollar reserves are outside the US of A and many of the loans to the “emerging markets” are dominated in dollars, effectively raising rates and raising loan valuation amounts at the same time. Ouch! Big Ouch!

    I know Chairman Jerome is trying to get us back to a working market economy, but he might want to be careful.

    It’ll be different this time. I know that’s a hill to die on, but it will be. The counterfeit funds the fed will now remove from the economy actually never entered the economy, never had an inflationary or stimulus effect when it was created, and will thus not contract the economy as its being withdrawn. I believe most of this money ended up back in the federal reserve as bank deposits held in reserve.

    But I do agree, caution should be the word of the day.

    • #5
  6. I Walton Member
    I Walton
    @IWalton

    DonG (View Comment):

    The Fed was idiotic under LBJ. Now the Fed is too restrictive. There is no inflation and the strengthening dollar means the Fed should increase the money supply (preferable by reducing interest on excess reserves). The unemployment rate is not a concern as the labor force participation rate is low. We still have lots of people on the sidelines. Never believe complaints by the chamber of commerce folks about a tight market. Look at relocation data!

    And Nixon.

    Interest rates are still low, there remains base money created by the previous administration just sitting there that could expand into money as demand for credit grows with an expanding economy.   Yes there are plenty of people sitting on the side lines and we still pay folks not to work.  Good time to stop doing that.  I’d advise not to fix anything.  Just keep the money in check, don’t interfere in the economy, keep deregulating, build productivity by getting the Feds out of education and expand the labor supply by  moving welfare to the states, and  encourage on the job training by ending minimum wages.

    • #6
  7. Shawn Buell (Majestyk) Contributor
    Shawn Buell (Majestyk)
    @Majestyk

    The Fed is unwinding its balance sheet.  That’s probably why you’re seeing a plateau in real estate prices… that and the fact that they’re utterly insane.

    At some point, you’d figure that the market is sufficiently glutted with high-priced real estate to sate demand.  Maybe that in combination with unwinding is keeping inflation in check.

    • #7
  8. Unsk Member
    Unsk
    @Unsk

    “It’ll be different this time. I know that’s a hill to die on, but it will be. The counterfeit funds the fed will now remove from the economy actually never entered the economy, never had an inflationary or stimulus effect when it was created, and will thus not contract the economy as its being withdrawn”

    It appears to some extent you are right that QE really didn’t enter the American economy. A lot of it  did go overseas though. I hoping you are correct that withdrawing QE now will not have the normal effect. So far it hasn’t.  We shall see. We are in unchartered territory.

    Peter Cook has a post from RealInvestmentAdvice  at Zerohedge that somewhat supports your theory- “What can QE tell us about QT”.

    He asserts that each dose of QE actually raised rates by increasing inflationary expectations short term , while also raising assets prices and stock prices. Now he expects the reverse to be true from QT.  It’s a nice theory, but others assert that 40% of dollars are actually overseas which was flooded with liquidity during QE, and that the pullback with QT is causing a great tightening havoc there which eventually is going to come home to bite us. Who knows? Too many moving parts to assess. 

    • #8
  9. Shawn Buell (Majestyk) Contributor
    Shawn Buell (Majestyk)
    @Majestyk

    Unsk (View Comment):
    He asserts that each dose of QE actually raised rates by increasing inflationary expectations short term , while also raising assets prices and stock prices. Now he expects the reverse to be true from QT. It’s a nice theory, but others assert that 40% of dollars are actually overseas which was flooded with liquidity during QE, and that the pullback with QT is causing a great tightening havoc there which eventually is going to come home to bite us. Who knows? Too many moving parts to assess. 

    My concern is actually on the deflationary side.  QE basically purchased scads of commercial paper and real estate holdings… but at relatively depressed prices.  The reality of that situation now is that they’re selling those assets back at what now look like inflated prices.  Paradoxically, this could take more cash out of the economy than they initially pumped in.

    We can’t hit inflation targets?  I wonder why.

    • #9
  10. OccupantCDN Coolidge
    OccupantCDN
    @OccupantCDN

    Unemployment is a trailing indicator, I think it normally happens at or just after the peak of the business cycle.

    This is just an observation of malinvestment. The 1970s was a unique time bad political leadership causes a poor economy.

    LBJ worked overtime to load the economy down with new intrusive regulations.

    Nixon closed the gold window, wage and price controls, and also loaded the economy with new intrusive regulations.

    Jimmy Carter, well was Jimmy Carter.

    Andrew Klavan recently said that revolutionaries have no respect for history, and thus repeat it. Maybe this is broadly true of politicians in general. Its the exceptional leaders like JFK, Reagan who have seen history unfold, and are mindful not to repeat it.

    • #10
  11. James Gawron Thatcher
    James Gawron
    @JamesGawron

    JimP,

    The most important thing in understanding this period after 1969 is to realize that all of the good work had been done by Eisenhower and Kennedy. Spending & taxation kept in check. Solid values, social & economic, emphasized. Lyndon Johnson inherited a low unemployment rate, low interest rates, and a very low inflation rate all with a high growth economy. Johnson was the proverbial bull in the china shop. Not satisfied with a free society that was giving its people of all classes a better life than they had ever known before, Johnson sort of decided he was Gd. He not only simultaneously declared a War on Poverty and plunged us into a million man incursion into the swamp of Viet Nam, but he was extra proud that he had passed more ‘legislation’ in his first 100 days than FDR. Of course, FDR had inherited an economy of 25% unemployment with negative growth.

    The result of this was, of course, a huge inflation in the economy, an endless demoralizing war with a draft army, and the worst race riots ever seen in America. Things were just beginning to get soft in 1969. Nixon did his best to buck the inflation. However, Carter came in and the dam broke. Strangely, the malaise that Carter spoke of really got going just when he came into office and seemed to immediately dissipate as soon he was gone. I’ve always felt that Carter himself was the malaise.

    My joke was that Johnson was the bull in the china shop and Carter was the butterfly at the iron foundry. This dynamic duo did more damage to this country then any external force could ever have done. I think if you added their economic IQs together they wouldn’t add up to 100.

    What I’m trying to tell you is that the last thing you need to fear is a low unemployment rate. It means the full employment economy that you should be aiming at. It wasn’t the low unemployment rate in 1969 that damaged anything. It was all of the lunatic politics of Johnson & Carter before and after 1969.

    Regards,

    Jim

    • #11
  12. milkchaser Member
    milkchaser
    @milkchaser

    DonG (View Comment):
    Never believe complaints by the chamber of commerce folks about a tight market. Look at relocation data!

    What should we look for in the relocation data?  Could you explain?

    • #12
  13. OccupantCDN Coolidge
    OccupantCDN
    @OccupantCDN

    milkchaser (View Comment):

    DonG (View Comment):
    Never believe complaints by the chamber of commerce folks about a tight market. Look at relocation data!

    What should we look for in the relocation data? Could you explain?

    In a tight labor market folks would not feel the need to relocate to another city to find work – because there is plenty of jobs where they live.

     

    • #13

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