October Jobs Report to Inform on the Timeline to Reach Full Employment

The October employment report will be released at 8:30 am ET this morning and it will be a key piece in refining the timeline to full employment which, in turn, will most likely guide when interest rate hikes begin. The median Bloomberg expectation is that 450 thousand jobs were created versus a disappointing 194 thousand in September with the unemployment rate dipping to 4.7% versus 4.8% the prior month. The dispersion of estimates for job growth are a little tighter than has been the case in prior months with a low of 250 thousand to a high of 700 thousand.

Earlier this week, ADP reported  571 thousand new private sector jobs, easily beating the 400 thousand expectation and slightly more than the 523 thousand added in September which was revised lower from 568 thousand originally reported.  Both ISM reports for October also posted solid employment readings which adds to the probability of a solid jobs number today.

One Way to Measure Full Employment?

While the tapering decision was detailed at Wednesday’s FOMC meeting, with an as-expected mid-2022 timeline for completion, today’s jobs numbers will fill in some information as to how fast the labor market is moving towards the Fed’s maximum employment mandate. Powell stressed that the price increases seen to date are mostly supply and not wage driven and that leads to the supposition they will be patient with rates and look to return to full employment before hiking.


Source: Bloomberg

The Fed has been somewhat vague in identifying particular labor market metrics that it is watching to determine full employment but one they have mentioned is the Employment-to-Population Ratio. Much has been written about the changing nature of the labor force in the face of the pandemic, with millions of workers dropping out to attend to homebound children and/or elderly. The employment-to-population ratio, however, avoids the nuances of labor force calculation and can sometimes provide a clearer read on employment trends.

The ratio (total employed/working age population) we show above is further refined by looking at distinct age cohorts within the ranks of the employed. One such cohort is called the Prime Age Group, those between the ages of 25 and 54.  By removing the younger aged workers you reduce the variability of those moving into and out of school during the year. By removing the older cohort (55 and over) you reduce the vagaries around early retirement especially prevalent during the pandemic.

As the chart shows the current rate has been stuck at 78.0% for two straight months.  While that is still short of the 80.5% pre-pandemic high it is certainly much improved from the 69.6% pandemic low. The rate started the year at 76.3%, so an improvement of 1.7%, or approximately 0.19% per month. Thus, getting back to something close to 80.5% may take well into next year, perhaps  lining up with the completion of tapering around mid-year. Keep an eye on this rate as a possible signal as we move through 2022.

Underemployment Rate Signals Full Employment Around Mid-2022

Another measure the Fed will be watching in determining a return to maximum employment is the so-called Underemployment Rate, or U-6 in BLS parlance. This captures a wider swath of people by including not only the unemployed but also the marginally attached (not working and not currently looking but still wanting a job), and those working part-time for business reasons but wanting full-time work. By including the marginally attached it recognizes those that fell out of the stricter U-3 unemployment definition but would likely return to the labor force when conditions allow.

Source: Bloomberg

As the graph illustrates, the underemployment rate bottomed in December 2019 at 6.8%, peaked at 22.9% in April 2020, and currently sits at 8.5%.  Bloomberg does not provide forecasts for this metric so it’s a case of wait and see for October. Getting that rate back in the neighborhood of 6.8% is something the Fed will want, but while dramatic improvements were made early in the recovery it’s likely the final 1.8% needed to return to pre-pandemic levels will become more grudging.

The rate started the year at 11.7%,  so its dropped 3.2% in nine months, or 0.36% per month. This implies a return to pre-pandemic levels could be just five months away. However, the last eight months in 2020 saw the rate drop 9.5% so the law of diminishing returns is evident.   More likely, the declines become more grudging the closer we get to the December 2019 lows. This implies the underemployment rate, like the employment-to-population rate, returns to pre-pandemic levels in mid-to-late 2022, providing another signal to the Fed that maximum employment is upon us and rate hike lift-off not far behind.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.33 0.65 0.94 1.29 1.94 2.40
0.50 0.32 0.62 0.88 1.18 1.80 2.29
1.00 0.31 0.59 0.85 1.13 1.71 2.16
2.00 0.58 0.79 1.05 1.59 NA
3.00 1.01 1.53 NA
4.00 1.48 NA
5.00 1.44 NA
10.00 NA

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Published: 11/04/21 Author: Thomas R. Fitzgerald