By Mark Schniepp
September 2015

Approaching Full Employment

Less than two years ago the Congressional Budget Office predicted a sluggish labor market improvement in the U.S. economy with the unemployment rate making no improvement throughout calendar year 2014, forecasting an unemployment rate of 6.7 percent at year’s end.

Los Angeles Times online, February 4, 2014

Well, that forecast did not work out too well for the CBO.  The U.S. labor market created 2.6 million jobs in 2014 and the unemployment rate fell to 5.6 percent at year’s end.

Now, eight months later, the economy is on pace to create 3.1 million jobs in 2015—the most since 1999—and the unemployment rate has dropped to 5.1 percent.   This rate is either at or is very close to the “full employment” level of unemployment. Modern notions peg the rate at or around 5.0 percent.  We haven’t seen an unemployment rate that low since April of 2008.

In California, the pace of job creation has been stellar, eclipsing previous years in the current economic cycle and pushing the rate of unemployment down to 6.2 percent.  For the state as an entire economic region, we are still a ways off from the full employment rate of unemployment, but the likelihood is for that threshold to be reached by the summer of 2016.

For many counties in the state, full employment has certainly been reached. Here’s the most recent list of the counties with the lowest rates of unemployment:

What is Full Employment?

Typically, it’s when employers experience difficulty filling job vacancies and they have to bid up wages or salaries to keep employees from leaving, or to recruit skilled employees from other firms or right out of college.

Nationwide, there still appears to be slack in the labor force because wages are not generally rising yet.  That’s because the “underemployment rate” is still relatively high.  The underemployment rate includes the unemployed plus those people working in part time positions that would prefer to work full time. The rate in August was 10.3 percent of the labor force—a big improvement over the peak value of 17.4 percent in 2009. Using this rate to ascertain reaching full employment, the country will arrive there by next summer, and wage growth is expected to accelerate in 2016.

Here in California, wages are already rising in the largest labor market centers, most notably, the Bay Area.  And the creation of technology jobs is the principal reason why wages are moving upward.

Since early 2014, wage/salary appreciation rates have jumped, from approximately 2.5 percent in 2012 and 2013 to over 4 percent this year in the Bay Area.  In Southern California, wage inflation moved from 1.5 percent increases per year to over 3.0 percent this year.

More wage increases are coming in California, sooner than later.  Labor shortages are occurring in construction, in K-12 education, in trucking and other transportation, some retail, and for skilled positions in healthcare and technology.

Higher wages will push the general inflation rate higher. Businesses will face higher costs which reduce profit levels and stock valuations.  Consequently, as the expansion matures and full employment is reached, we’ll have new reasons to worry about increased volatility in the stock market, and the timing of the next recession.

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Upcoming Autumn Conference

Santa Barbara Technology and Industry Association
Economic Summit

November 5, 2015
Radisson Hotel, Santa Maria
8:00 am – 10:00 am

Register for the Event

By Mark Schniepp
August 2015

The Expansion has Kicked into Higher Gear

The U.S. economy continues to make steady and consistent progress.  Strength is evident across most sectors and markets, especially the labor market where a full employment economy is now less than a year away.

Reviewing this newsletter a year ago ( the August 2014 edition), I wrote:

The evidence to date in 2014 indicates that the economy is in its best condition and growing at its fastest sustained pace since 2007.   Employment is now expanding at a rate that would bring the economy to full employment in two years or less.

• Consumer confidence is at a 7-year high
• The growth of manufacturing remains positive including job creation
• The financial markets appear very healthy as the bull market takes a needed breather this summer
• Treasury bond yields have recently declined and are lower today than a year ago
• Over the last 12 months, inflation is running at a rate of 1.4 percent
• Existing home sales were higher for the third straight month in June and home price appreciation is still running positive, at 4.3 percent

Today, a full year later, not much has changed. Consumer confidence has slipped some, largely because of the “breather” that the stock market is taking again this summer.  Nevertheless, the bull market has not been vanquished. The Nasdaq is 100 points from its all time high. The S&P 500 index is about 20 points from its all time high. Interest rates are sinking again. Oil prices are below $50/barrel again.  Inflation over the last 12 months has been an imperceptible 0.1 percent, and home sales in June jumped to their highest level since before the last recession.

Since 2011, gold prices have been on the decline as the U.S. recovery gradually picked up momentum and investors “rebalanced” their portfolio away from gold and into stocks. The rapid downturn in gold prices during July also reflects investor expectations of an interest rate hike by the Fed this year. The Fed is still expected to begin tightening monetary policy in September.

There is no whiff of a slowdown in the economy. If there was, you’d see it in the financial markets.  And although the broader indexes like the S&P and Nasdaq have generally moved laterally since May, volatility has been remarkably absent from the market.  International events like a possible Greek exit from the euro zone or a bear market in Chinese stocks are just not big or bad enough to impact the U.S. economy.

Households are in a Strong Position to Increase Spending

The creation of jobs is strong and broad-based, and wage growth will accelerate more significantly as the economy approaches full employment. Household debt is about as low as it has ever been, and many homeowners have locked in the exceptionally low interest rates by refinancing their mortgages.

Because stock prices are near record highs, and house prices are rising solidly throughout the nation and especially in California, higher asset values make us feel wealthier and more comfortable to spend. Consumers also have plenty of savings, having stashed away most of what they saved on lower gasoline costs over the last 6 months (except in California where the premium to the average U.S. price has now widened from 37 cents on February 1st to over $1.10 per gallon today: $2.63 versus $3.71).

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Upcoming Economic Forecast Conference

2015 Ventura County
September 10, 2015
Westlake Hyatt, 7:30 AM

Have you ever had to obtain financing for your business or to buy commercial real estate or apartments? Are you thinking about it? We are going to present a comprehensive picture of the current commercial lending environment, the demand for hard and soft money, and how that is all changing in the marketplace, this year and next.

Mark Schniepp will also update the outlook for the California and Ventura County economies.

• Where are we now in the business cycle?
• Is the housing market going to improve with the threat of higher interest rates?
• What can you expect over the next year regarding worker recruitment and compensation?