President Trump sees shuttered factories, abandoned towns and “American carnage.” But the real economy has hit a more encouraging milestone, according to one prominent economist.
“The economy has returned to full employment,” economist Mark Zandi of Moody’s Analytics declares in a new report. “With full employment, good things should soon happen for many of the heretofore financially disenfranchised.”
Skeptical? Okay, so let’s briefly examine what Zandi is talking about. “Full employment” doesn’t mean everybody’s getting rich, or everybody who wants a good job has one. Obviously that is not the case. “Full employment” is instead an economic term that means the unemployment rate is low by historical standards, most workers looking for a job can get one, and labor shortages are developing in some areas.
The unemployment rate was at 4.4% right before the last recession started, in 2007. It peaked at 10% during the recession and has since fallen back to 4.4%. Moody’s and other forecasters expect unemployment to fall further, perhaps even dipping below 4% by the end of the year or early 2018.
The regular unemployment rate doesn’t capture people who give up on work or work less than they want to, but another government measure does. The portion of working-age people who are unemployed, “marginally attached” to the labor force or working less than they want to is 8.6%, also closing in on the pre-recession low, which was 7.9%. That measure is likely to improve, too.
Full employment might seem like a fuzzy concept, but it’s important because of what usually happens next. As the labor market tightens, employers begin to have trouble finding qualified workers to fill all the jobs they have open, which means they have to start paying more. As wages rise, more people who gave up on work change their minds and start to look for a job again, lowering the unemployment rate further. Rising wages also leads to higher inflation, forcing the Federal Reserve to raise interest rates more aggressively. This often coincides with the end of an economic expansion and the onset of a recession.
There are plenty of signs this is playing out, more or less as the textbooks predict. Employers report more than 5.7 million job openings across the country, which is close to the highest-level since such record-keeping began in 2000. Small-business hiring is back to pre-recession levels, and nearly half of small-business owners say there are few or no qualified applicants for the jobs they have open. Wages are finally showing signs of rising, after flatlining for years.
For Trump, the implications of full employment are quite favorable—unless he does something to disrupt the economy’s natural acceleration. “Everywhere you look, things are pretty good fundamentally,” analyst Greg Valliere of Horizon Investments recently told Yahoo Finance. “We have moderate growth, moderate inflation, moderate interest rates, and good corporate earnings. The fundamentals are quite good.”
Trump, needless to say, wants to claim credit for a strong economy, instead of owing a debt to his predecessor, President Obama. But this is a bogus issue. The economy, at this point, is largely chugging along on its own, goosed more in recent years by the Federal Reserve’s monetary stimulus than by any action from the White House or Congress. Besides, the president ordinarily gets credit or blame for the performance of the economy under his watch, even if the seeds were laid months or years earlier.
The risk for Trump is that some of his policies could jeopardize the healthy economy he was lucky enough to inherit. At the current pace of job creation—186,000 new jobs per month during the last year—the need for workers will exceed the supply of them, which would harm growth. This is already happening in parts of the economy where labor shortages are developing, such as residential construction in some regions. One solution, especially with an aging workforce, is more legal immigration—but Trump clearly leans in the opposite direction.
Trump also favors trade policies meant to “bring back” manufacturing jobs, even though there are nearly 6 million jobs open right now. That suggests it would be more effective to train displaced workers for jobs that actually exist than to place big bets on the likelihood of old jobs coming back.
Trump might also want to think about the odds of the business cycle peaking and a recession developing toward his third or fourth year in office, which seems plausible. If Trump manages to get a tax-cut or infrastructure bill through Congress, it could boost the economy right around then. But Trump’s plans for both initiatives seem likely to stretch into 2018, if not further, and they could founder altogether if the controversy over Trump’s firing of FBI Director James Comey metastasizes into a crisis. Good thing the economy is doing pretty well on its own.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.