The U.S. Unemployment is at a 50 Year Low — So Why Are Investors Worried?
The year was 1969. The average cost of a new home was $15,550. Gas was 35 cents a gallon. The first man landed on the moon. Woodstock attracted more than 350,000 fans from around the world. And the U.S. employment rate plunged to a mere 3.5%.
Well, fast forward exactly 50 years, and while virtually everything else has changed — for example, instead of people asking for the nearest payphone, they’re asking “what is a VoIP number?” — but the unemployment rate is once again back down to 3.5%. At first glance, this should be a cause for celebration. Yet some investors are sounding alarm bells instead of uncorking champagne bottles.
Why? Because they’re worried that ultra-low unemployment levels will invariably force the Fed to raise interest rates, which in turn would make it more costly for businesses to borrow money — and also make existing debt loads more expensive to carry. Historically, this has tended to drive stock prices and dividends lower.
The other concern is that very low unemployment invariably drives up wage inflation, since there are fewer qualified workers available to perform certain jobs. In order to attract and retain them, employers offer more salary and benefits — which is obviously good for workers, but not employers who take a hit to their bottom line. In some cases, wage inflation can be so costly that employers shed more jobs than they create.
And to further rain on the festive economic news parade, there are concerns that a low unemployment rate doesn’t accurately capture the number of people who are either under-employed (i.e. working in jobs that are not commensurate with their skills and abilities), or have stopped looking for work entirely because they couldn’t find something suitable. Often, many of these people end up working in the “underground economy” which is not just precarious and can potentially be dangerous, but it doesn’t generate income tax revenue that states and cities need to pay for roads, schools, hospitals, and other public goods.
With all of this being said, economists surveyed by Bloomberg predict that the Fed will hold the line on the federal interest rate for the next couple of years (currently at 1.75%), and won’t be deterred by the 2020 Presidential election from pursuing their 2% inflation target (the current inflation rate is 1.8%). This means that investors probably have some more bull markets to enjoy, before the cycle invariably turns — as it always does — and we head into bear market territory.
When (not if) that happens, given that the Fed doesn’t have much room to cut interest rates to spur consumer spending, we could be in for a sustained recession. Or perhaps even the Great Recession Part 2.