Rising Unemployment Rate?
The U.S. unemployment rate has been rising. It is up 0.8% since early 2023. Often, rising unemployment is a worrisome sign that a recession could be coming. As you may know, we have been suggesting over the past several months that the risk of recession is rising, and higher unemployment does help that narrative. But, while we do feel the risk of recession is rising, we also think there are other potential explanations for the increase in the unemployment rate. Let’s take a closer look.
Considering how many new jobs are needed to keep the employment rate steady can be a helpful guide for unemployment. Before the pandemic started in 2020, the approximate number of monthly new jobs needed (the breakeven rate) was about 75,000. Since the pandemic, that number has increased. The reasons for the increase are logical. The first is the strong increase in immigration after the pandemic, and the second is a standard, cyclical increase in the labor force participation rate. The labor force participation rate dropped substantially during the pandemic and has been recovering. It now stands at 62.7%. This is from a low of 60.8% during the pandemic, though well below the high of 67+% seen in the late 1990s. This resulted in a new breakeven rate of approximately 275,000 new jobs needed to maintain the unemployment rate. The pre-pandemic norm for the labor participation rate was about 63%.
Labor Force Participation Rate
Looking at the number of new jobs posted in the United States, we see a drop off over the last several months. In March 2024, 310,000 new jobs were created, slightly over the 275,000 breakeven rate. The unemployment rate in March 2024 was 3.8%. More recently, the number of new jobs created in August 2024 was 142,000, and the unemployment was 4.2%. July was lower at only 89,000 new jobs and an unemployment rate of 4.3%. The cycle low for unemployment came in April 2023 at 3.4%. Considering that the flow of immigrants is slowing and that the labor force participation rate is back near trend, we feel the breakeven rate of jobs has shifted down. Our approximation for the breakeven rate will range from 150,000 to 175,000.
This combination of much higher levels of immigration and the recovery of the labor participation rate has shifted the amount of new jobs needed to maintain the unemployment rate. We feel the number of new jobs created has decreased, but it is explainable given the recovery since the pandemic. As these various levels of economic activity change, it is not unreasonable that the unemployment rate has increased. We also feel that during the pandemic recovery, it is likely that the unemployment rate was unusually low given the large number of pandemic-displaced jobs being filled.
Historical Standards of Unemployment
Keep in mind that even at the most recent unemployment rate of 4.2%, that is a low level by historical standards. The average unemployment level from 1948 until 2024 was 5.69%, quite a bit higher than where we are today. The point we are trying to make is that although we pay attention to unemployment, given the changes we’ve outlined, we do not feel that unemployment is heading into an evident recession. While we believe the risks of recession have increased, we do not think the labor market is driving it. We feel the number of new jobs being created is close to what is needed as a breakeven with unemployment. The unemployment level might go higher from here; it indeed might, but we do not feel it will be dramatic. And that is especially true if we see a decrease in interest rates from an upcoming Federal Reserve (Fed) meeting. The Fed continues to try to navigate the U.S. economy into the fabled soft landing of reducing inflation without triggering a recession. Although we feel recession risks have increased, we still feel the soft landing could happen.
All the best,
