The Correct Unemployment Rate?

The topic of the unemployment rate has come up a lot recently with regards to debates around full employment, wage growth, inflation, the stage of the business cycle, and of course monetary policy.  These are all critical inputs into the macro backdrop which is of great relevance to most of the key markets (think stocks, bonds, currencies).
The chart in question came from the latest edition of the Weekly Macro Themes report, which looked at the issue from a few angles in terms of the outlook for the Fed.
The chart shows the unemployment rate, standardized against its own history, alongside two key survey measures of labor market conditions.

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Specifically the chart is showing the historical z-scores (i.e. latest reading minus long term average divided by long term standard deviation). Looking at it this way allows an objective method of comparison between series across time.  The black line is the unemployment rate from the BLS, the blue line is from the NFIB small business survey (whether firms are finding jobs difficult to fill), and the grey line is from the Conference Board consumer confidence survey (whether consumers say jobs are easy to find).
In my view the signal from the unemployment rate is correct because we basically see in this chart independent verification from small businesses and consumers - two different parts of the economy and from two different perspectives (finding employees vs finding jobs).
The key implication is that by all 3 of these measures, the US labor market is looking very healthy indeed.  The fact that the unemployment rate is comfortably below the NAIRU (Non-Accelerating Inflation Rate of Unemployment) also implies the jobs market is at full capacity, i.e. we're already seeing full employment. This is a tight labor market.
Straight off the bat this ticks the box on half of the Fed's mandate, but it also means that wage inflation is likely to accelerate from here.  Having come from such a deep and protracted downturn in the labor market though, it is likely to come with a lag.
So to sum up, the unemployment rate is right - as confirmed by consumers and small business. In time this will lead to more rapid wage inflation and means more stimulus removal (aka tightening) by the FOMC.  At this point the risks to higher inflation and a more aggressive Fed are weighted to the upside as this classical sign of business cycle maturity comes to bear.
This article originally appeared as a submission at See It Market



About the Author

Top Down Charts
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.