Blog Post

AEIdeas

The US unemployment rate fell to 3.7 percent in September, the lowest rate since December 1969. That’s even lower than the jobless rate during the 1990s internet and productivity boom. Other bits of good news in the report include decent monthly job growth of 134,000 — probably a depressed number because of Hurricane Florence. With upward revisions to the previous two reports, job gains have averaged 190,000 per month over the past three months. Such gains are consistent with “steady declines in the unemployment rate and solid increases in aggregate household income,” according to Barclays. There was also a 0.3 percent gain in average hourly earnings, a tick higher employment rate, and a 420,000 rise in the household measure of employment easily outpaces a 150,000 rise in the labor force.

Good stuff.

But what happens next? One should hope events play out today better than after that 1969 milestone. A Federal Reserve history of the 1970s described it as a “turbulent time” for the American economy. And it sure was. The economy slipped into recession after the employment peak, one of four over the next dozen years. Meanwhile, the inflation rate that had begun creeping up in the mid-1960s would become the Great Inflation and hit 15 percent by 1979. From 1966-1982, the stock market fell more than 70 percent in real terms. By decade’s end, America was suffering a “crisis of confidence,” according to President Carter.

Not good stuff. (On Twitter I joked the “3.7 percent unemployment rate is a great omen. Last time it was that low, 1969, what came next was a decade of prosperity and economic stability as American had never before seen.” Not everyone got the joke.)

One way to avoid a repeat is making sure an independent Fed remains intolerant of sustained high levels of inflation, and that the public stays sure the central bank is willing and able to keep doing its job. That, especially at a time of big fiscal stimulus when the economy already appears within walking distance of full employment — or at least where constraints on labor supply start biting. (Longer-term, government should focus on boosting productivity, which downshifted at the start of the 1970s.) RSM economist Joseph Brusuelas cautions that the low jobless rate “is indicative of what will become a growing problem in the current expansionary cycle: there simply are not enough willing and able workers to meet demand, which will result in bottlenecks in housing, manufacturing and agricultural industrial ecosystems going forward.”

So far at least, this current Fed is taking seriously its inflation-fighting mission. Capital Economics notes that the “recent strength of the economy appears to be pushing Fed officials in an increasingly hawkish direction” and as “the boost from fiscal stimulus fades and rising borrowing costs start to weigh more heavily on rate-sensitive activity, an economic slowdown next year will force the Fed to end the current tightening cycle sooner than officials anticipate.”