Strong labor market continues
The September unemployment rate declined from 3.9% to 3.7%, its lowest level since 1969.
The Conference Board’s Consumer Confidence Index rose to 138.4 in September, which is up from 134.7 in July, and is the highest level since October 2000.
That’s not surprising. The economy added 134,000 jobs in September, bringing the 12-month total increase to 2.54 million—an acceleration over the full-year 2017 increase of 2.19 million new jobs. It also exceeds the 2016 total of 2.34 million new jobs.
The September unemployment rate declined from 3.9% to 3.7%, its lowest level since 1969. The improvements have been broad-based from a geographic perspective.
Unemployment rates now are lower than year-ago readings in 83% of the 388 metropolitan areas the Bureau of Labor Statistics tracks.
In addition, the U-6 unemployment rate settled in at 7.5% in September, reflecting a 1.1 percentage point decline over the previous year.
The U-6 rate includes everyone who is unemployed, those who are employed part time but who’d prefer to work full time, and those marginally attached to the labor force.
Most important, the number of people who are underemployed (the part-timers in the U-6 data) has declined by about 825,000 over the past year.
The difference between the headline and U-6 rates (3.8 percentage points) is now below the long-run average reading, which is closer to four percentage points. That’s a clear reflection of labor market health.
Strong labor markets have translated to modestly higher pay for many workers. Average hourly earnings are up 3% in the past year, which means they’re keeping pace with inflation.
The Census Bureau reports that inflation-adjusted median household income increased 1.8% in 2017 to $61,372. This is the third-consecutive annual increase in median household income.
In addition, household balance sheets have never been in better shape: The stock market remains near all-time highs, and home prices are rising at healthy rates; about 6.5% over the past year nationally.
You may have seen reports on the liability side of the balance sheet: Household debt levels now stand at an all-time high.
But household debt as a percentage of take-home pay now is 95%, and it has hovered near a cyclical low for the past two years.
The current reading is about where debt-to-income levels were 16 years ago, and is well below the peak level of almost 125% seen amid the formation of the real estate bubble during the last expansion.
This combination of rising asset values and declining liabilities means household net worth is increasing—quickly. Net worth as a percent of take-home pay is now 683%, an all-time high.
It’s no surprise that increasing wealth is associated with household spending increases and household borrowing increases over time.
The bottom line: Many key measures suggest consumers are willing and able to borrow. And the Federal Reserve isn’t likely to ruin the party.
CUNA economists believe the Fed will continue to raise interest rates. But we also believe the magnitude and pace of those increases will be manageable, and they won’t likely cause a significant decline in loan demand over the next year.
Expect one additional quarter-point federal funds rate increase this year and two increases of similar magnitude in 2019.
More than one Fed policymaker has stated a reluctance to purposely invert the yield curve by pushing the federal funds target rate above the 10-year Treasury yield. Historically, there’s a strong link between aggressive Fed tightening that inverts the curve and the onset of recessionary periods.
MIKE SCHENK is CUNA’s deputy chief advocacy officer for policy analysis and chief economist.