On April 6, 2018, we said the following:
“As we approach the 3.80% level, it should go without saying that all the signs are in place for an overextended economic boom.”
Just look at the data, the last time the unemployment rate was below 3.80% was way back in 1969.
From where we stand, it appears that the direction for the economy is to one extreme or the other. No longer do we think there will be the gradual sloping (gradual relative to what is coming) to the upside in GDP, stock market and real estate prices. Either a bubble phase or a bust phase.
Unlike the many critics of the stock market and economy who are always saying that we are in a bubble simply because the trend is up, we have clearly outlined the parameters of what a bubble is within the context of the market conditions. What has been experienced in the economy and the stock market from 2009 to the present has been a normal reaction to the crushing decline from December 2007 to March 2009.
On the topic of the unemployment rate, we said in July 2013:
“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”
If the unemployment rate drops further then we would have stretched the capacity of the economy to its 48-year limits on the downside. If the unemployment rate increases from the current level it would, as has been the case in the past, jump dramatically.
Have we eliminated the prospect of the unemployment rate going lower? Absolutely not. However, the rate of decline has been on a trend towards zero since October 2014.
Once the rate of change in unemployment goes from “decelerated rate of decline” [falling] to “accelerated rate of increase” [rising] the tide will have turned. Our April 2018 posting highlighted the eight prior periods where the unemployment rate experienced “accelerated rates of decline” and then “decelerated” to ultimately get to “accelerated rate of increase.” In that posting, we estimated the timeframe for when the economy would go into recession.
Presently, we anticipate the unemployment rate rising to the 6.30% level as a natural reaction to the current low levels. While the unemployment rate can go lower, there is a tremendous tradeoff to achieving lower levels. It is quite possible we have seen the best of times with a declining unemployment. Anything below the current levels will come at a tremendous cost in the next recession.