US: Ever-tightening labour market – BMO CM

Michael Gregory, Deputy Chief Economist at BMO Capital Markets, notes that the US unemployment rate dropped to 4.6% in November, its lowest level since May 2007.

Key Quotes

“It was 4.4% back then, which also happens to be the cycle-low for the November 2001-December 2007 expansion. As such, the current jobless rate is historically low, but the labour market is not historically as tight. There is more slack than the unemployment rate alone portrays, which is one reason why wage inflation has not been accelerating in a consistent fashion. However, we might not be too far away from this juncture. Broader measures of labour market slack have been improving.”

“Our in-house measure of labour market slack had recently been more range-bound but the preliminary reading for November appears to have broken out, now at its lowest level in more than 8½ years.”

“Interestingly, with the newly-elected Administration and Congress poised to pursue stimulative fiscal policy, GDP and the demand for labour should both get a boost. But this is going to happen at a time when the labour market will be even tighter than it is now, likely emphasizing the connection between slack reduction and wage acceleration going forward. Meanwhile, an anti-immigration policy bias could constrain the supply of labour, accentuating the slack reduction-wage acceleration dynamic even more.”

“Bottom line: While there is more wage-dampening slack in the labour market than the unemployment rate portrays, there is not a lot left. For example, if we simply track the pace of improvement over the past two years, our in-house slack metric would be flashing full employment by next summer—well before any major fiscal stimulus package kicks in.”