The WSJ points out that something curious has been happening since the end of 2017: the U.S. economy has added nearly 2.7 million new jobs but the unemployment rate has barely budged, falling from 4.1% to 4.0%. What can explain this phenomena and why does it matter to stock market investors?
We’ll start with the latter. The Federal Reserve watches the unemployment rate. A steady unemployment rate (versus a falling one) gives the Fed cover to keep interest rates where they are and not raise them. Lower interest rates are generally good for stock investors.
So why is it happening? The first reason is that more people are entering the job market. So while we have more people employed, we also have more job seekers (which is generally a good sign). The second reason is more nuanced. But basically, the official jobs numbers and the unemployment rate rely on two completely different surveys. And right now, those surveys differ significantly on the number of new jobs added.
In other words, one of the surveys is wrong. And historically, when the two surveys disagree, the jobs report tends to be proven right over time, with the unemployment rate eventually “catching up”. Long story short, based on the reported job gains figures, the unemployment rate could actually be 3.6%, not 4.0%.
The implications? Per the article below, “It is one thing for the [Fed] to sustain its current wait-and-see attitude on policy with the unemployment rate around 4%. It would be quite another for it to stick to it if the unemployment rate starts heading toward 3%.” Or put another way, the Fed may have to start raising interest rates again soon.