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CBO: Unemployment Rate To Fall & Wages To Rise Through 2018

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by Gary D. Halbert
February 7, 2017

  1. January Unemployment Report Stronger Than Expected
  2. Skilled Workers Are Scarce in Tight Labor Market
  3. CBO Report: Unemployment Rate to Fall Through 2018
  4. Fed Leaves Rates Unchanged at First Meeting of 2017
  5. Special Report – “Searching for Yield in an Uncertain World”


A new report from the Congressional Budget Office (CBO) predicts that the US unemployment rate will continue to fall through 2018. The same study predicts that growth in hourly wages will increase significantly this year and next. I’ll give you the details on this uplifting report as we go along today.

But first let’s take a close look at last Friday’s better than expected unemployment report for January, where new jobs were much higher than expected. On a related note, we’ll look at new data showing that skilled workers are getting harder and harder for employers to find.

Finally, I’ll summarize the news from the Fed’s first policy meeting of the new year, which was held last Tuesday and Wednesday. While the Fed left rates unchanged, it still anticipates several rate hikes later this year.

January Unemployment Report Stronger Than Expected

The Commerce Department’s Bureau of Labor Statistics (BLS) reported on Friday that the US added a net 227,000 new jobs in January, well ahead of the pre-report consensus of 175,000, and the strongest showing in four months.

The headline U-3 unemployment rate ticked up slightly to 4.8% as more Americans returned to the workforce last month.  The more encompassing U-6 measure of unemployment – which includes those who want to work but haven’t looked in the last month and those working part-time because they can’t find full-time jobs – rose two-tenths to 9.4%.

The Labor Force Participation Rate rose better than expected to 62.9% in January, the highest level since September, as about 700,000 Americans returned to the workforce last month. Working age Americans not in the labor force declined to 94.4 million, down from 95.1 million in December. Yet the participation rate remains at levels not seen since the late 1970s.

Unemployment Rate

The other good news in the report was that full-time jobs surged, climbing by 457,000 to 124.7 million, while part-time positions plunged by 490,000 to 27.4 million. Job creation was strongest in retail, with 46,000 positions added despite the end of the holiday shopping season. Construction gained 36,000, financial activities were up 32,000 and professional and technical services saw a 23,000 gain. Bars and restaurants contributed 30,000 to the total, while health care added 18,000.

The bad news in the January report was in the numbers for wage growth. Average hourly pay rose at an average annual rate of only 2.5% last month, below the pre-report expectation of a gain to 2.7%. In January, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $26.00, following the 6 cents increase in December.

The slower wage growth came even though worker pay got a boost last month because minimum wage increases kicked in on January 1 in 19 states. In California, for example, the minimum wage rose to $10.50 an hour from $10 last year.

Skilled Workers Are Scarce in Tight Labor Market

Small and medium sized US employers continue to complain that it’s difficult to find workers with the right skills. Now, with unemployment near its lowest level in nine years, they are having to do more of the difficult work of training them.

Nearly two-thirds of small businesses are spending more time training workers than they were a year ago, according to the latest survey by The Wall Street Journal and Vistage International, a San Diego executive-advisory group. That could give more Americans access to skilled manufacturing jobs as companies invest the time and resources to bring in less-experienced workers.

“The biggest challenge confronting firms is their need to expand hiring in an already-tight labor market,” said Richard Curtin, a University of Michigan economist who oversaw the survey.

Unemployment Rate

As a result, some firms are casting a wider recruiting net and landing workers with fewer relevant skills. “It’s very challenging to find individuals for job placements, especially ones with any type of experience. We’ve had to look to younger generations with less experience,” said Travis Lane, chief executive of safety equipment manufacturer Rock Exotica.

Coming out of the recession, the Clearfield, Utah company didn’t have an internal training program. But over the past three years, Mr. Lane has hired staff to build and manage a detailed set of training procedures for new hires. Even so, it now takes about six months for new workers to handle machinery unsupervised, up from about three months just a few years ago.

The unemployment rate peaked at 10% in October 2009, according to Labor Department data. At the time, more than 15 million Americans were actively looking for a job but couldn’t find one. Since then, the figures have roughly halved: As of December, the unemployment rate was 4.7% and only about 7.5 million were actively looking for work.

That’s a huge effect that has drained the labor pool. The share of small businesses with few or no qualified applicants for job openings hit a 17-year high in November before receding some in December, according to a National Federation of Independent Business survey.

Other measures, though, suggest there are still plenty of workers on the sidelines. The question is, do they have the right skills?

The broader U-6 gauge of unemployment, which includes people who have stopped looking and those who are part-time but want full-time jobs, remains elevated. The share of men and women age 25 to 54 in the workforce matched a three-decade low in late 2015 before beginning a slow rebound.

Other factors also may be at play. Within the manufacturing sector, for example, firms often complain that vocational training isn’t as prevalent for high school or community college graduates as it was in past generations.

Companies with sophisticated machinery often need workers with specific skill sets. Some companies curtailed training during the recession to save money and because plenty of people were available. Now they’re ramping up again.

Now, companies and workers appear to be responding to an improved economy. The number of factory workers who quit their jobs held at an eight-year high in October and November, a sign of confidence in finding something better. Manufacturing wages in December were up 3.4% from a year earlier, outpacing the 2.9% gain for all private-sector workers.

New CBO Report: Unemployment Rate to Fall Through 2018

While it’s impossible to know for sure what the political and economic landscape will look like a couple of years from now, a new analysis from the Congressional Budget Office should give some confidence to Republicans about the conditions they’ll be facing when mid-term elections come around in 2018.

The new report on labor market projections suggests that when voters go to the polls in 2018, unemployment rates will be so low that economists will consider the country to be “above full employment.” What’s more, it suggests that by that time, hourly labor compensation will have been on a sharp upward trend for nearly two years (hasn’t started yet though).

Unemployment Rate

As you can see in the chart above, the CBO believes that hourly wages will increase significantly from now to the end of 2018, rising from an annual rate of 2.5% in January to well above 3.0% later this year and next year. The CBO expects the annual growth of hourly wages to dip slightly in 2020 but remain above 3% through at least 2027. The CBO Report states:

“As [labor market] slack diminishes and firms must compete harder for a shrinking pool of unemployed or underemployed workers, growth in hourly compensation will rise, in CBO’s assessment.

CBO estimates that the Employment Cost Index for workers in private industry will grow by more than 3 percent per year, on average, over the next several years, up from the 2 percent average from 2010 through 2015.

Other measures of compensation, such as the average hourly earnings of production and nonsupervisory workers in private industries, are similarly expected to grow more quickly than in recent years.”

It’s important to note that the CBO believes the economy will still be operating below its full potential in 2017 and 2018, but labor market progress will be apparent both in the employment numbers and in wage growth, nevertheless.

If this proves to be true, it should be good news for Republicans in Congress who will face the voters in 2018 after two years of complete GOP control of Washington. Of course, a lot can happen between now and then, especially with an unpredictable Donald Trump in the White House.

Fed Leaves Rates Unchanged at First Meeting of 2017

The Fed Open Market Committee (FOMC) held its first policy meeting of the new year last Tuesday and Wednesday and voted to leave its Fed Funds rate target unchanged at 0.50% to 0.75%. However, the policy statement released after the meeting gave no indication that the Fed changed its plans to raise the key rate several times this year.

The FOMC painted a relatively upbeat picture for the economy. “The labor market continued to strengthen and… economic activity has continued to expand at a moderate pace,” the statement noted. It also acknowledged the improved consumer and business sentiment following the election of Donald Trump as the US President.

The upbeat economic assessment suggested that the central bank should be on track to raise interest rates later this year. The next FOMC meeting is on March 14-15 and will include Chair Janet Yellen’s first press conference of the year.

The minutes from the Fed’s December policy meeting were released on January 4 and suggested that the Committee was unsure about the pace of rate hikes this year due to uncertainty over the Trump administration’s fiscal stimulus plans and other economic policies.

Fed chair Janet Yellen said recently that fiscal policy was one of the factors which will affect the course of monetary policy over the next few years. But she reiterated that it’s still too early to assess the impact from possible economic policy changes, because the size, timing and composition of such changes remain uncertain.

Yellen also emphasized that the central bank might continue to raise interest rates gradually, because the economy seems unlikely to pick up markedly in the near-term due to factors such as weak foreign demand and slower labor market growth.

For these reasons, most Fed-watchers don’t expect the FOMC to raise rates at the next meeting on March 14-15. Most feel that the Committee will enact the first rate hike of 2017 at the June 13-14 meeting. That remains to be seen, of course.

Special Report – “Searching for Yield in an Uncertain World”

With all the uncertainty in the markets today, especially with the new Trump administration, and with interest rates still at extremely low levels, many investors have struggled to find investment opportunities with attractive yields. The yields on bonds remain dismal, and rising rates usually push bond values lower. With the stock markets at or near all-time highs, now may not be a great time to invest in traditional equities or bonds.

Finding investments with attractive yields that are not highly correlated to the stock and bond markets is difficult, to say the least. In order to help investors, we recently developed a new Special Report – “Searching for Yield in an Uncertain World.”

This Special Report shows you how stock and bond correlation has risen significantly and how stock market volatility has increased dramatically. This has made proper diversification even more important – and we don’t mean diversification just with the typical balance of traditional stocks and bonds.

This Special Report will explain why investors searching for yield should seriously consider so-called “alternative investments” which are basically investments outside the norm of traditional buy and hold stock and bond strategies. These strategies give investors opportunities that can help generate attractive yields without being closely tied to the traditional stock and bond markets. This can be very important, especially with all the uncertainties out there today.

Searching for Yield in an Uncertain World is yours free of charge. Download your free copy now and understand why finding investments with attractive yields can be so difficult. You’ll also learn more about alternative investments and how they can help provide attractive yields while also attempting to reduce volatility.

All the best,

Gary D. Halbert


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