Labor Slack: How Much Room?

|
Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PPLC, PPSC, PSQ, QID-OLD, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWL, RWM, RYARX, RYRSX, SBUS, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU-OLD, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, USSD, USWD, UWM, VFINX, VOO, VTWO, VV
by: ValueAnalyst

Summary

The flattening in the yield curve has sparked worry among investors.

Building upon Is The Economy Overheating, I next explore labor slack.

I do not expect a recession to start in 2018.

In Is The Economy Overheating?, I laid the groundwork for deeper analysis into inflation and the overarching business cycle, as I suspect we are approaching the late stages of the current one. This article explores the labor slack.

Low Unemployment

The following graph plots the often-referenced, official U3 unemployment rate:

Chart
US Unemployment Rate data by YCharts

The above graph illustrates that the official unemployment rate is near its five-decade lows. This, however, does not tell the full story. As I discussed in Is The Economy Overheating?, the PCE Price Index, both headline and core indices, have remained below the Fed's 2% target.

Shrinking Underemployment

In addition to the U3 unemployment rate, I also like to keep an eye on the U6 unemployment rate, which includes:

  • U4: "Discouraged workers," or those who have stopped looking for work because current economic conditions make them believe that no work is available for them;
  • U5: Other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently; and
  • U6: "Part-time workers" who want to work full-time, but cannot due to economic reasons.

The following graph presents the U6 unemployment rate in the last three business cycles:

Chart
US U-6 Unemployment Rate data by YCharts

The above graph illustrates that the ongoing decline in underemployment has accelerated in 2017, and that the U6 rate is now at 7.7%.

Readers should also note, however, that even though the current underemployment rate of 7.7% is below the low of the previous cycle, which was registered in December of 2006 at 7.9%, the 1990's business cycle had seen an even lower underemployment of 6.8% in October of 2000. In that business cycle, the underemployment took two years to decline from the current 7.7% to 6.8%.

Since the denominator of the U6 rate, or the size of employment, is about 160 million, another percent improvement in the U6 rate could mean 1.5+ million more jobs before the economy experiences significant overheating, especially considering the 3% decline in the Labor Force Participation Rate in recent years:

Chart
US Labor Force Participation Rate data by YCharts

Bottom Line

Even if we assume that the participation rate will increase only slightly in 2018, at an average rate of 150,000 monthly job additions, the economy has about one more year to run before significant overheating in the economy. I will keep an eye on the U6 rate, PCE Price Index, and the labor force participation rate for ongoing analysis.

Follow For Free Articles

If you enjoyed this article, please scroll up to the top of the page and click the "Follow" button next to my name. Your support will allow me to invest further time and resources into creating proprietary research for you.

Premium Research

If you're interested in learning about my investment methodology as well as high-quality fundamental research on Tesla, supported by detailed financial projections by product and service line, including years 2019 and beyond, as well as timely price target alerts and weekly Live Chat community discussions, join Tesla Forum. I'm confident that you will find my research to be very insightful, and I look forward to discussing ideas with you.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.