What happens when things are as good as they get?
That’s what many people must have been wondering when the April jobs report was released early Friday morning. The U.S. economy added 164,000 jobs, the unemployment rate fell below 4% for the first time since December 2000, and average hourly earnings rose by only 2.6% on an annual basis.
There was far too much hand wringing about the employment figures, which were below economists’ projections. Yes, it was a little short, but the average job creation for the last three months topped 200,000.
But that missed the entire point: At 3.9% unemployment, the economy is at full employment.
Yes, there are still a lot of people out of the labor force, but retirements, disabilities from drugs or injuries, millions of ex-cons and parolees, and people who just don’t have 21st Century job skills have kept the workforce participation rate low.
With employers across the country practically begging to fill thousands of open positions, that sure sounds like full employment to me.
But even with that, wages rose by far less than economists projected, tamping down fears of inflation. The ten year Treasury note yielded 2.95% at the close—below the magic 3% number—and the Dow Jones Industrial Average rallied 332.36 points Friday.
So, is it too good to be true?
Maybe. As I wrote a year ago in MarketWatch, “a rock-bottom unemployment rate has been an excellent indicator of upcoming recessions and a very good warning sign of corrections and bear markets ahead.”
April 2000 was the only time in 50 years the unemployment rate fell below 4% (it hit 3.8% then). At 3.9% we’re almost there.
How low can it go? To the 3.4% it hit in 1948 and 1968? That was truly the Golden Age of the U.S. economy, and I don’t believe it could go that low again. Which means that if history repeats itself, we may see a new recession or bear market within a year.
But the real good news in the jobs report was the subdued wage inflation, considerably below the Federal Reserve’s danger zone. That means the rate-setting Federal Open Market Committee (FOMC) can just tap the brakes rather than lead-foot it to stop a new inflationary wave in its tracks.
If rates remain low and tax cuts remain the gift that keeps on giving, corporate profits will continue to surge and the unemployment rate may dip a bit lower but we could avoid recession for longer than usual. That would be not just as good as it gets but the best of all worlds.