Can the Economy Sustain the Current Job Growth Pace?

The U.S. economy has been in growth mode since the end of the Great Recession in 2009. Whether that growth occurred as part of a recovery or expansion is the topic for another day, but for more than eight years, we have been on a positive track.

The question now is, how much longer can we remain on this track? Various employment indicators point to a tightening job market that might have difficulty sustaining the current job growth pace.

One of the most closely watched and widely reported measures that comes from the Bureau of Labor Statistics (BLS) is the national “headline” unemployment rate or U3. This percentage is simply the number of persons unemployed and currently looking for work divided by the civilian labor force. The unemployment rate fell to 3.8% in May, matching the rate in 2000, and actually lower than the unrounded rate back to 1969.

The U3 unemployment rate can be misconstrued to represent all unemployed or underemployed workers, but in reality, there are other workers not currently looking for work or otherwise marginally attached to the workforce (discouraged workers). The unemployment rate that captures these people is the U6 rate. It peaked at more than 17% during the recession but has dropped to just 7.6% in May, less than half the peak and its lowest level since 2001.

Meanwhile, monthly job gains have averaged 200,000 jobs since January 2011. During the previous economic expansion prior to the Great Recession, monthly job gains averaged 103,000 jobs, while the boom years of the 1990s produced an average of 226,000 jobs monthly.

Digging deeper into the job gain numbers, it is often useful to clarify which industries and employment sectors are creating the most jobs. This is another indicator of economic health. If most of the jobs being created are in lower-paying retail or food service sector categories as opposed to higher-paying managerial or manufacturing jobs, things may not be that great. While there are still several lower-paying service jobs being created, more growth is occurring in the manufacturing, healthcare and professional sectors (averaging about 22,000, 33,000, and 39,000 monthly jobs over the past 12 months, respectively) requiring certain skill sets.

Circling back to the unemployment rate, two related measures are the labor force participation rate (LFPR) and the employment-population ratio. The LFPR represents the proportion of the civilian non-institutional population (including students, retirees, and others not in the labor force) that is in the labor force (employed and unemployed). It has been hovering just under 63% since 2014, after peaking at more than 67% in the late-1990s. The employment-population ratio is the proportion of the civilian population that is employed. It also peaked at the end of the 1990s (at about 65%), but currently stands at 60.4%. While the employment-population ratio has been steadily increasing for the past three to four years, the LFPR may never return to its levels seen before the recession and might have settled into a new normal.

Additional employment measures come from the BLS’s JOLTS data (Job Openings and Labor Turnover Survey). This monthly survey provides measures on openings, hires and separations including quits, layoffs and discharges. The relationship between the elements of this last category can point to the strength of the employment market. If layoffs and discharges are decreasing, the economy is improving. Conversely, quits tend to increase in an improving economy as workers feel more confident in the economy and are willing to change jobs or strike out on their own. With both series headed in opposite directions, the quits-to-layoffs-and-discharges ratio has also been steadily increasing since 2009, averaging two quits per separation since January 2018.

Lastly, job openings are another good indicator for employment growth. During an economic expansion, employers demand more workers, and the number of job openings increases. This figure excludes internal transfers, promotions, or layoff recalls. Aside from the raw change in job openings, another useful comparison is to divide the number of unemployed by the number of job openings. This ratio peaked at more than 6.7 unemployed per job opening in 2009, at the height of the Great Recession.

As with several of these indicators, there has been a slow and steady decline in the ratio since then with the latest data boding well for the economy. The number of job openings has surpassed the number of unemployed for the first time since this series began in 2000. The most recent figures show that job openings exceeded the number of unemployed by 352,000 in May.

All of these various employment indicators point to a tightening job market, and although there are almost 96 million people not in the labor force, only about 5.2 million of them currently want a job. This shrinking pool of potential employees (along with a portion of the unemployed currently looking for work) may struggle with the skills mismatch issue and require additional education or training in order to fill the job openings that now exceed the unemployed. Going forward, it may be difficult for the U.S. economy to maintain an average of 200,000 jobs created each month as the pool of potential hires decreases.