Slowing labor force growth is a structural, demographic trend that is holding down potential growth. We expect weak labor force growth to feed through into the monthly payroll report. As fewer people enter the workforce, “trend” payroll growth - the payroll gain that is consistent with the unemployment rate holding steady - has most likely fallen below 100K.8

200,000 payroll growth is unsustainable Sources: Bureau of Labor Statistics, FS Investments. 200K PAYROLL GROWTH IS UNSUSTAINABLE June 2011 August 2017 0% 2% 4% 6% 8% 10% 5-year average payroll gain (206K) Payrolls (K) Unemployment rate (%) 0K 100K 200K 300K 400K 500K

We will be watching: We expect monthly payroll growth to slow as labor markets continue to tighten. This could come as a shock to investors who have gotten used to 150K–200K payroll gains a month.9 Our expectation is that slower labor force growth will mean the unemployment rate should stabilize between 4.0%–4.5% going into 2018.

Risks to our view: Monthly payroll growth may defy gravity. Should payrolls continue to surge ahead at or near the pace of the post-financial crisis expansion, the unemployment rate would continue to drop. In this scenario, average hourly earnings could turn sharply higher, and the Fed would need to step on the brakes with a more aggressive rate hike path. We believe a drop in the unemployment rate below 3.5% would be a trigger for significantly higher rates.

Next economic indicator: Business investment >>

8 “Trend Job Growth: Where’s Normal?,” FRBSF Economic Letter, October 24, 2016.
9 Average payrolls for 2016 were 179,750, Bureau of Labor Statistics.

<< Previous economic indicator: Real GDP
<< Take me back to the start

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.