The Recent Jobs Numbers Make Interest Hikes More Likely

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The Dow Jones Industrial Average sank quite a bit recently, thanks to the recent 5.5% job unemployment figure. According to many economists, a 5.5% unemployment rate is an optimal employment rate. What this means is that people who can have jobs or who have the attitude and ability to get jobs already have jobs. This is a practical unemployment rate. Meaning, the only people that are still looking for a job are people who probably won’t be able to get a job. It sounds harsh but that’s the economists’ perspective on the lowest optimal employment threshold.

The problem with this analysis is that it leaves out a very troubling fact: The US labor-force participation rate is at its lowest point in over 36 years. This means that more and more Americans are choosing not to work. For some reason or other, they just choose not to look for work. Maybe it’s something that the job is beneath them while others are living with their parents or living with their relatives. Others are maybe going back to school or others are deep in America’s welfare system. Regardless of the reason, more and more Americans are simply not going back to the labor force.

There’s a lot of debate regarding this figure. On the one hand, you have economists saying that this is due to the baby-boom generation retiring. While there’s a lot of truth to that, what is alarming is the other side of the argument. If you look at the numbers, a large chunk of those people that are choosing not to work is actually aged 25 to 54. This is the age range of people that you would normally expect to get out there and look for a job.

It appears that the US Federal Reserve is beginning to get used to the concept that this is a permanent pattern. If that is the case, then expect interest rates to spike up. Why would the US Federal Reserve do this? First, obviously, to head off inflation. Second, inflation is going to happen if the US job market is actually as tight as official figures portray to be. Why? If you take all those people out who are no longer looking to participate in the labor market, we have a tight labor market. Meaning, wages have to go up to get people to switch jobs. That is going to put a lot of inflationary pressures on the US economy. It’s going to be very interesting how this all pans out in the near term.

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