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.

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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.


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