In the last 50 years, the last 600 months, the US unemployment rate has been below the current 3.8% for just 9 months (less than 2% of the time).
This is less than 2 years after the rate hit a modern HIGH of 15%.
9 states set all-time lows this month: Nebraska (2.1%), Vermont (2.1%), Indiana (2.3%), Kansas (2.5%), Montana (2.6%), Oklahoma (2.6%), Arkansas (3.1%), West Virginia (3.9%) and Mississippi (4.5%).
In February, 31 states had material decreases, while 19 had immaterial changes and NO states had material increases.
At the metropolitan area level, 50 areas sported unemployment rates of 3% or less, far below historical results.
11 areas were at crazy low 2.3% unemployment rates or lower: Lincoln, NE and Madison, Wi. Logan, Provo and Ogden UT. Elkhart, Columbus, Bloomington, Lafayette, Ft Wayne and Indianapolis, IN.
Real, inflation-adjusted, interest rates have declined greatly since 1980. At that time, with the risks of variable inflation and surging oil prices, the real mortgage interest rate was 8%. It declined to 5% in the 1990’s and 4% in the 2000’s before falling to 2% in the 2010’s. The financial cost of owning property has rarely been lower.
House Values are Up, Way Up
House prices grew relatively consistently from 1970 through 2000, with a spike in 2005-9 and a return to trend values in 2010-12. In the last 10 years, house prices have increased by 6% annually in nominal terms, or 4% annually in real terms.
Home Ownership Rate is Rebounding, Up 2%
The US homeownership rate averaged 47% from 1900-40. It increased smartly in post WWII times to 60% by 1955 and 64% by 1965. Homeownership averaged 64%+ for the decade of 1969-78. It increased by 1% during 1979-81. In the midst of a difficult depression, homeownership rates dropped back to 64% by 1985, about the same for the last 20 years, setting a “normal” level. Homeownership rates stayed at 64% for the next decade. Ownership rates increased from 64% to 69% in the next decade before declining right back to 63% by 2015. In the last 7 years, despite many headwinds, the home ownership rate has increased by 2%.
Number of Homeowners has Jumped by 7 Million
In 2000, there were 69M owner-occupied homes in the US. This increased by a solid 7M to 76M by 2005. The housing market hit a lull and the number of owner-occupied homes essentially stayed flat for a dozen years, through 2017. The supply of owner-occupied homes then rose by a strong 7M in the next 4 years to 83M!
The housing market is inherently volatile, typically rising by 2 times the trend and then falling to one-half of the trend. Annual housing starts averaged 1.6M from 1960-2008. They declined by a severe 75% to just 0.5M in 2009. Housing starts have subsequently grown 3-fold to 1.6M annual housing starts, but the accumulated lack of new supply is impacting housing markets today.
The period from 1982-2000 showed homeownership rates by the 5 age segments remaining relatively constant; 65+ 78%, 55-64 80%, 45-54 76%, 35-44 67% and <35 40%. The 65+ group increased homeownership from 75% to 80%. During this time, the overall US homeownership rate increased from 65% to 69%, mostly due to the aging of the population, now more heavily weighted towards the groups with 76-80% homeownership versus the 40-67% younger groups.
Homeownership rates grew from 2000 to peak rates in 2004, before declining significantly for all groups except for the 65+ cohort which essentially held it’s own. The adjacent 55-64 class fell 4%. The middle 45-54 group dropped 7%. The typically homeownership growing 35-44 group cratered by 9%. The young <35 group fell by 5%. Hence, the overall rate fell dramatically during this time.
There is a 30 point gap between married couples and other groups, with 84% of married couples owning homes versus about 55% for other family structures.
The US shows dramatically different homeownership rates by racial category. The differences between the 1995 non-Hispanic White rate (70%) and Others/Asians (50%), Hispanics (42%) and Blacks (42%) remain large in 2021 where we see White (74%), Other (57%), Hispanic (48%) and Black (44%). The groups homeownership share gain from 1995 to 2005 were similar, ranging from 6-10%, but the decline from 2005-2015 was only 3-4% for Whites and Hispanics, but 7% for Blacks and Others. The improvement from 2015 to 2021 has been 2% for 3 groups and 4% for the Other/Asian group.
Summary
The Great Recession flattened the housing market. The number of owner-occupied homes in the US remained level at 76 million from 2006 – 2017. The number of housing starts plummeted from 2.0M to 0.5M per year, compared with an historic average of 1.6M. New home construction first exceeded 1.2M units (75% of historic average) again only in 2020, a dozen years later. New home-owning households have increased by 7M units in the last 4 years! The homeownership rate is up 2 points, from 63.5% to 65.5%. Supply is responding to increased demand and higher home prices. Homeownership rates will increase with the economic recovery, but be constrained by higher home prices.
I’ve summarized the last 30+/- years of US labor market experience with just the peak unemployment rates of the business cycle, plus December, 2020 as a secondary indicator of the peak Covid/pandemic impact, since the actual peak numbers in April, 2020 were so extreme and short-lived.
Less experienced individuals have historically had higher unemployment rates in the US. Compared with the 45+ age group, the 35-44 age group has averaged 0.3% higher unemployment; 5.2% versus 4.9%, a relatively minor difference. The 25-34 year age group has averaged 6.6% unemployment, a substantial 1.7% higher rate. The job-seeking 16-24 year age group has averaged 13.2% unemployment, more than twice as high as the 25-34 year age group and more than 2.5 times the 45+ age group (8.3% extra).
The “extra” unemployment for 35-44 year olds versus the 45+ group has been zero for the last 15 years, versus a minor 0.5% premium historically. It appears that workers are reaching full employment value at an earlier age.
The “extra” unemployment for 25-34 year olds versus the 45+ group has been 1.0% for the last 15 years, a small reduction from the prior 1.5% premium.
The “extra” unemployment for 16-24 year olds at the peak of the business cycle versus the 45+ group averaged just 5.3% recently versus 7% historically.
The 2007-2009 recession showed a greater impact on modestly younger (25-44 year old) workers, with their unemployment rates increasing by 2.5% more than the 45+ group.
Despite the reduction in the inexperience penalty for youngest workers (16-24) in the last few years, they did experience much higher “extra” unemployment during both the 2007 and 2020 recessions.
Very young workers continue to be penalized for their inexperience, but other workers from ages 25+ seem to have relatively equal economic value today.
Note that the current unemployment rates for those aged 25+ already matches the average MINIMUM rates of the last 4 business cycles: 3-4%. The 8.3% unemployment rate for the 16-24 year age group is below the minimum in 1990, 2000 and 2007, and just above the 7.9% level of Sep, 2019.
Hotel capacity increased by 50% from 1995 to 2019.
Demand grew at the same 50% rate, although not always in lockstep.
Occupancy averaged a healthy 63% (almost two-thirds) through this period, with significant differences due to changes in construction and the economy.
The price per room averaged about $125 per night in real 2020 dollars, again varying based on supply and demand, but overall, relatively constant.
Total hotel industry real revenue ($2020) for the 21 years from 1998 through 2019 increased by a little less than 50% according to Bureau of Economic Analysis (BEA) figures.
Real consumer only (leisure) sales increased by nearly 100% during this period.
Real consumer sales per person increased by about two-thirds.
Hotel industry operating statistics before 1995 are not readily available. The tremendous growth of the industry in the last 30 years of the twentieth century is illustrated by the more than three-fold growth in industry employment, from one-half million to 1.8 million. Note that employment did not follow the growth of rooms during the first 20 years of the next century.
Oxford Economics developed an industry promotion brochure in 2019 that has some longer-term data. Total real (inflation adjusted) revenue is up more than 4 times in 40 years. Our 1995-2018 data shows relatively small changes in average hotel prices. I suspect that there were “real” increases from 1978 – 1995 as the industry was growing quickly in response to consumer demand.
A similar measure, gross domestic product (GDP), or production value added, net of the cost of inputs, increased 3-fold in 40 years.
Consumer spending on accommodations has increased about 3 times as fast as GDP overall in the last 40 years.
Hotel purchases as a share of total consumer spending has increased by more than 80% in these 40 years.
Overall demand for hotel rooms per citizen for all uses (personal, business, government and foreign travelers) has increased by 20% across 30 years. Personal and foreign travel have grown at a faster rate.
The short-term rental market (personal vacation rentals, Airbnb) has grown from zero to 10% of the hotel room volume and appears to have years of growth ahead of it. This growth is not included in the industry summary figures.
Occupancy is forecast to return to the historical average of 63% for 2022 and increase further in the following years. The industry “lost” more than $100B of revenues due to the pandemic, so analysts estimate that the industry will return to “normal” employment, prices, profitability and reserves by 2025.
Consumer access to hotels and private rentals has increased by 3 or 4 times in the last 50 years, at a faster rate in the first 25 years, and somewhat slower in the last 25 years. Hotel business models at 63% occupancy seem to justify continued capital investments in new supply. Prices have been relatively flat for 25 years. Competition between brands, pricing segments, corporations and private owners seem to be effective at providing adequate capacity and service options at competitive prices.
Inflation is back in the news after several quiet decades. The components of the All Urban Wage Earners and Clerical Workers are listed above, comparing Feb 2020 with a 1997 base of 100, and then Jan 2022 with the same base. The most recent weighting of categories is in the rightmost column.
Overall, consumer prices have risen by a modest 2-2.5% annually, just 59% through Feb 2020 and 75% through Jan 2022. Yes, that is a 10% price increase in the last 2 years: 175/159.
The 3 largest components have shown price rises close to the overall average. The biggest sector, Housing (39%), displays slightly higher inflation, at 72% and 85%, closer to 3% annually, with a possibility of higher rises for the next few years. Transportation (22%) reveals lower than 2% annual inflation with a 45% increase across the full period. Food and Beverage (15%) is close to the average with 64% and 82% growth.
Some smaller areas have seen slow price growth. Apparel (3%) has declined in actual prices during this period. Recreation prices (4%) have grown by less than 1% annually.
Education and Information (6%) prices have grown by 1% annually, but this category includes 3 very different subsectors. Information Technology prices have declined throughout the period. No simple 25- year summary is available. Communications prices have dropped by an average of 1% annually. Education prices have grown much faster, more than offsetting the decline in IT and communications prices. The Tuition, Fees and Child Care measure of prices increased by 165% and 171%, more than twice as fast as overall inflation, roughly 4% annually. College tuition (data not in Fred database) increased by 191% and 196%, about 4.5% per year.
The Other Goods and Services (3%) category mostly contains miscellaneous items that don’t fit cleanly in Housing or Food/Beverage. The category displays faster price increases (3.5%) on average due to the very sharp increase in Tobacco prices (taxes) which have grown 4-fold in 25 years (7%/year). Note that alcoholic beverage prices increased by a little more than 2% annually
Finally, Medical Care (7%) has grown by 116% – 125% during these 25 years, about 3.5% annually.
Overall goods prices have grown slowly and service prices more rapidly. Medical care and college prices stand out for their increases, while the price of housing/rentals is flashing warning signs.
The “real” interest rate is the nominal interest rate minus the inflation rate. It reflects the “real” cost of borrowing. Prior to the “Great Recession”, 2% was a typical “real cost” of borrowing money. To entice lenders to lend, borrowers had to pay some “real” amount extra per year, 2%.
The Federal Reserve did what it could to “ease” monetary conditions and lower interest rates to offset the negative impact of the Great Recession in 2008-9.
By the end of 2011, real rates were ZERO or negative. In other words, the Fed went too far. By June, 2013, rates returned to positive territory, but only reached 0.5%, where they remained through the end of 2017, despite president Trump’s complaints that the Fed was constraining the Trump economy. Monetary policies were “easy” for a very long 7-year period.
By May, 2019, real interest rates were back to just 0.5%, having reached a peak of just 1% for 3 months at the end of 2018. With further “easy” money policy, real rates dropped back to ZERO percent by August, 2019. The economy was now 9 years into recovery. Interest rates should have been higher.
The Fed found new ways to “ease” monetary policy as the pandemic struck in 2020. Real interest rates dropped to -1% and stayed there. Monetary policy has been “easy” for more than a decade. Time for inflation. “Too much money chasing too few goods”. “Inflation is always and everywhere a monetary phenomenon”.
Supply Chain Disruption
The recovery has been faster than anyone expected, but most critically, with consumers less eager to buy “in-person” services, they have greatly increased their purchases of goods. The modern US economy relies on imports and modern manufacturers and retailers hold lower inventories to buffer changes.
Standard macroeconomic theory focuses on aggregate demand versus aggregate supply as the key driver of output, unemployment and inflation. When total demand grows faster than remaining excess capacity of total supply, inflation results. The biggest driver of changes in aggregate demand is the level of government spending (demand) minus government taxation (reduces demand).
Historically, various pressures have kept the federal budget deficit between -3% and +3% of GDP, allowing the government to buffer change in private demand through the business cycle. The large drop from -2.5% to -5% in 1979-82 was a factor that contributed to the last major round of US inflation. A similar decline from -2.5% to -4% in 1989-91 increased inflation, but not on such a large scale. It also served to convince President Clinton and congress to reduce the deficit to ZERO by 1997 and run a surplus for a few years.
The 2001 recession caused a 2.5% decrease in this ratio, from a surplus to a deficit. Bush tax cuts, foreign wars and congressional agreement lead to deeper deficits at 3.3% in 2003-4, before some recovery to -1% in 2007, prior to the Great Recession.
Bush, Obama and congress agreed to spend more to fight the Great Recession, pushing the deficit to a worryingly low -9.8% in 2009. There was no agreement on a second major round of spending, so the deficit improved a bit to -6.6% by 2012 and then to a more reasonable -2.5% in 2014-15. Instead of continuing to improve with the economic recovery, it fell a little, to 3.1% in the last year of the Obama economy.
President Trump’s first order of business was to enact “job creating” tax cuts. Unfortunately, the desired boost to economic growth to fund these tax cuts did not occur. The budget deficit increased from 3.1% to 4.6% of GDP, as the economy reached a record long recovery period of a full decade.
To address the pandemic, congress and Trump agreed to spend money to protect the economy and workers, leading to very large budget deficits of 15% and 12% in 2020 and 2021, respectively. Too much aggregate demand for the level of aggregate supply, so we have major inflation.
Summary
Easy money, easy fiscal policy and a 20% increase in demand for goods leads to major inflation. Like a frog getting boiled as a pot slowly warms up, we became complacent based on the apparently “just right” conditions of the late teens (2012-19). The federal budget deficit needs to get back above -5%, real interest rates need to become positive and consumers need to rebalance to consume more services and less goods. I don’t think we’ll see 7% inflation for 2022, but it looks like 4-5% is a good bet. Hold on.
Politics
Biden deserves a good share of responsibility for the government spending budget deficit, as he was seeking to make it even larger. I give him a “pass” on consumer demand for durable goods since it mostly occurred before he started. I also give him a “pass” for the loose Fed monetary policy which has been going on for a decade or so. He was wise to reappoint the Fed chairman, who I believe will raise interest rates as needed to get the real interest rate back to a proper level. In the meantime, Biden will pay politically for higher inflation, which has a “real” impact on the wallets of voters.
Ronald Reagan taunted Jimmy Carter with this question to voters in the 1980 debates. It helped him win.
Twelve years later, James Carville helped Democrats return from the political wilderness in 1992 with his advice to Bill Clinton that “it’s the economy, stupid”.
Politicians have used various measures, from unemployment to inflation to the “misery index” to jobs created to productivity to the stock market, to promote their success and detract from their opponents.
I want to focus on one measure, the ratio of the number unemployed to the number of job openings, to highlight the strength of the American economy in the last dozen years.
The Bush economy was widely criticized for its “jobless recovery” following the economically healthier Reagan and Clinton presidencies. The presidency started at close to 1 unemployed person per job opening. The recession pushed this up to 2.5x and then 3.0x. In labor market terms, this is a huge difference. At 1:1 or 1.5:1, unemployed workers expect to be re-employed quickly. At 3:1, some may enter the dark days of the “long-term unemployed”. After 3 years, the economy DID recover to 1.5:1, but it was unable to improve further. The “Great Recession” was a brutal job killer, pushing this measure of labor market tightness up four-fold, from 1.5X to more than 6X before its peak in the first half of 2010, as Obama and congress and the federal reserve bank wrestled with the situation.
Obama: Recovery and “New Territory”
Between April, 2010 and April, 2012, the economy cut this ratio in half, from 6x to 3x, a very solid performance. It took 3 years, until April, 2015, to complete the next 50% reduction, from 3x to the historically “very solid” 1.5X. The economy continued its growth for the next 2 years, but at a slower pace, reducing this ratio to 1.3X.
Trump: Even Better
The Trump economy continued to improve for the first 18 months of his term, reducing this ratio from 1.3X to 0.8X by September, 2018. This was a time of record low unemployment and economists recalculating their standard of “full employment”. While the economy continued to grow, the unemployment rate continued to decline and the stock market continued to climb, THIS measure had reached its minimum before the 2018 mid-term elections. It remained steady at the very positive level of 4 job seekers for every 5 jobs (0.8) for the next 17 months, until the pandemic disrupted everything. The ratio quickly shot up to 5X, not as high as the 6X that Obama faced, but very high. It quickly recovered to 1.4X by the end of Trump’s term. This was partly job recovery and partly fewer job seekers, but it was an amazing recovery in historic terms. Recall that 1.5X was “a good as it got” during George W. Bush’s presidency.
Biden: Even Better, Again !
In the first 6 months of the Biden presidency, this ratio dropped from 1.4X back down to the prior record level of 0.8X. Yes, by July, 2021, there were 5 jobs available for every 4 job seekers. This was as low as the ratio had previously fallen, even as the Trump economy piggybacked on the Obama economy and continued its extraordinary run. The ratio continued to fall in the next 6 months to 0.6X, an unheard-of level. 5 jobs for every 3 job seekers. It’s “no wonder” that voluntary job quits are at unprecedented levels. For, perhaps, the first time in American history, “everyone who wants to work, can find a job”. Whether you are right or left, Dem or Rep, this is “good news”. This is “great news”. Wages for the “bottom 20%” are rising in real terms. Income inequality is declining, a bit. The economy seems to be able to digest this new condition. And, the economy is not done growing, innovating, creating businesses, creating jobs, exporting, etc. About 2% of Americans are likely to be attracted back into the workforce in the next year or two, keeping the headline unemployment rate from going much below 4%, but pushing US real GDP growth to 4% in 2022 and close to 4% in 2023.
Summary
The “Great Recession” and the “once in a century pandemic” have been unable to disrupt the ongoing progress of the American economy and labor market. As a nation, IMHO, we have cultural and political challenges, but we “aught” to appreciate the power of the American economy to move forward.
Today’s news releases show 6.0M jobs added during 2021 according to the household survey and 6.5M jobs added according to the employer survey. The ADP employer jobs survey released this week showed 6.2M jobs added. The employer reported number of open jobs increased from 6.8M to 10.6M this year. Hence the total filled plus open jobs increased by 10.6M, from 149.3M to 159.6M, a truly incredible expansion of the US economy’s production potential and demand for labor. This is 1M more filled plus open jobs than the December, 2019 peak of 158.6M. Employers are clearly struggling to work this backlog down from the 10-11M range back to the pre-pandemic 6-7M level. This provides the demand side for another 8-12 months’ worth of 500K filled jobs added per month.
The 3 underlying measures use different definitions and survey methods, but in the long-run they generally agree.
The monthly changes are much less consistent. Much of the media highlighted that the employer survey data showed just 200K jobs added in December. The household survey indicated 600K jobs added, while ADP reported 900K jobs.
It’s best to look at all 3 measures to try to get a best estimate of the most recent changes. I see roughly 500K new jobs added each month from July through December. A flat number, not an increasing one. The first half of the year was probably adding a few more jobs each month, closer to 600K each.
From 2000-2009, the dynamic US labor market laid off workers at a consistent 2M per year rate. This declined a bit to 1.8M per year in the next decade. After the pandemic, the economy quickly returned to this 1.8M per year rate from July to December, 2020.
It has dropped and remained at a 1.4M per year rate at the end of 2021, fully 30% lower than its normal level. Good news, indeed.
Unemployment Claims
Historically, the US economy generated 350,000 new unemployment claims each week. This measure declined slowly after the Great Recession, reaching a nice 300,000 level in 2014. It slowly declined to a record low of 205,000 in Feb, 2020. The disruption rate dropped back down to the very high but stable 800,000 level from Aug, 2020 through Apr, 2021. In the last 8 months the rate has dropped very quickly back down to the record low 200,000 level!
Cumulative individuals claiming unemployment benefits has historically varied with the business cycle. We can see the increase from 2M to 4M at the turn of the century. The “Great Recession” had a greater negative impact, driving this number from 2M – 4M – 7M. This number fell throughout the extended business cycle recovery period, breaching 2M in Feb, 2017 and reaching a low of 1.7M in Feb, 2020. The unemployed number reached a full order of magnitude higher at 23M during the pandemic, then dropping to 13M in Sep, 2020 and 4M in Mar, 2021 and 2M in Nov, 2021 and finally equaling the record low in December, 2021 at 1.7M. This is great news!
Unemployment Rate
The unemployment rate has reached 4.2% and will return to its historical low of 3.5% in the next 4-6 months.
African-American unemployment was typically in the 8-10% range. It was driven down to the 5-6% level after the Great Recession during the extended business cycle expansion period. The rate is now below 7% and falling.
Hispanic American unemployment averaged 5-7% in the 2000’s. It spiked after the Great Recession to 13%, then slowly declined to 4.3%. It has since recovered to 5.2% and is dropping quickly.
Broadly Defined Unemployment
Broader definitions of unemployment show the same swift recovery from the pandemic situation.
Labor Force Participation
Labor force participation among the core 25-55 year age group reached an historic, and possibly unsustainable high of 83% in late 2019. It stayed around 81% at the end of 2020 and has since improved to 81.8%. This is one of the few labor market indicators that clearly shows that we have NOT “fully recovered”. There is 1% of the population waiting to be attracted back into the labor force.
The voluntary “quit” rate has doubled since the good side of the “Great Recession”. It is 50% higher than during the very favorable labor market of 2018-2020. Employees are confident that they can leave their current employer and find another position quickly.
This is the CRAZY positive labor market chart. Historically, we see 3-5M job openings. Expansion to 6M in 2016-17 as the post Great Recession recovery faced its “end”. But, the expansion continued even further, with 7M open positions available in 2018-20. The economy recovered to 6.8M open positions in Dec, 2020. This figure has since climbed to an incredible 11M open positions, more than double the historic norm.
Good News 