The Federal Reserve has a dual mandate and is required by Congress to foster maximum employment and price stability. The latter is easy to measure with various inflation measures. The former is more difficult to measure because the unemployment rate tells us just part of the story.
After the last meeting of the rate-setting Federal Open Market Committee, officials noted they believe there is still some slack in the labor market. Skeptics point to the 4.7% unemployment rate and wonder how much slack can exist when 95.3% of people who want a job already have one.
The chart below demonstrates that the Fed might be understating the fact that the labor market can improve. The economy is about 11.6 million jobs short of where employment was before the recession.
This chart shows the percentage of the country’s population that are employed. It’s different from the more widely cited employment-to-population ratio in that the chart includes only full-time employees and considers the entire population, rather than only the working-age population. This provides a more comprehensive view of the economy by showing the percentage of workers who are supporting the country’s lifestyle.
Just 38.4% of the U.S. population held full-time jobs in February, well below the peak of 40% seen before the Great Recession. Given the current population of the country, it would require 11.6 million additional full-time jobs to reach that level.
In the past eight years, the U.S. created 11.8 million jobs, about half of what is needed to return the country to the prerecession standard of living.
The lack of jobs is why the Fed is comfortable with raising interest rates. With so many full-time workers sidelined, there is little threat that wages will grow fast enough to spark inflation. Without inflation, interest rates should remain low by historical standards.
Until employment rises sharply, stocks remain the only source of potentially large returns for investors.
Michael Carr, CMT
Editor, Peak Velocity Trader