U.S. unemployment is primed to fall significantly further and could drop below 3 percent for the first time since 1953, the year central bank chief Jerome Powell was born.
That’s according to economists at Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Moody’s Analytics Inc. With an already solid economy set to receive a double dose of fiscal stimulus, they argue that a drop in joblessness from its 17-year low of 4.1 percent in February is all but inevitable.
And they say that a break below 3 percent is a distinct possibility -- even with the return of some workers to the labor force -- especially if Federal Reserve Chairman Powell doesn’t do more to slow the economy down.
“We have unemployment at 3.25 percent by the end of 2019,” Jan Hatzius, Goldman’s chief economist, said in an email. “A decline below 3 percent at some point is obviously possible.”
Such a drop would return unemployment to levels not seen in 65 years, when millions of Americans were out the labor force serving in the military during the Korean War. A job market that tight would be a boon for workers and for President Donald Trump.
But it would pose a quandary for monetary policy makers who are already beginning to worry about the risk of the economy overheating after Trump and Congress agreed to cut taxes and increase government spending.
To head it off, the central bank will raise interest rates four times each in 2018 and 2019, significantly more than Fed officials and investors currently expect, the Goldman, JPMorgan and Moody’s economists predicted. Peter Hooper, chief economist for Deutsche Bank Securities in New York, said there’s even a risk the Fed could end up increasing rates five times this year.
After beginning 2017 at 4.8 percent, joblessness has held at 4.1 percent for five straight months. It would have tumbled in February save for a big jump in labor force participation that Hatzius forecast won’t be repeated. Payrolls, meanwhile, grew 313,000, the most since 2016 and above the 90,000 to 120,000 range Fed officials reckon is sustainable in the long-run.
The steep drop in unemployment foreseen by the private economists stems from above-potential growth -- Moody’s Mark Zandi sees the economy expanding 2.9 percent this year versus potential of 1.75 percent -- and not from a contraction in the work force. Indeed, the forecasters all expect the labor force participation rate to hold roughly steady, as the re-entry of discouraged workers into the labor force is counterbalanced by the retirement of aging Baby Boomers.
Dartmouth College professor and former Fed official Andrew Levin said that may be too conservative. He sees room for labor force participation to rise, especially for prime age adults aged 25 to 54 -- a portion of the population that Powell highlighted in recent Congressional testimony.