Money Advice

Unemployment rate reached 17-year low as more people leave the workforce

Posted by The Simply Money Advisors Team on May 7, 2018 11:22:00 AM

The devil is in the details. Even though April's unemployment rate dropped from 4.1% to 3.9%, hitting a 17-year low, it wasn't because significantly more people found jobs. It was actually due to 236K people dropping out of the labor force. In a separate part of the April jobs report, businesses reported they were employing 164K more people than the prior month. 

While this was short of economists’ forecast (193K), new jobs from the last 2 months were revised higher by 30K. Businesses also reported that wages increased 2.6% over the past year, which was lower than what economists were projecting (2.7%).

As we expected, the Federal Reserve (Fed), our nation’s central bank, did not raise short-term interest rates last week. Interestingly, the Fed stated it expects inflation to run near the committee’s symmetric 2% goal. In other words, we believe the Fed will not be aggressive when raising rates once inflation rises above 2%. This is important because the Fed’s preferred inflation measure, core PCE, just increased from 1.6% to 1.9%. It’s likely the Fed raises short-term interest rates two more times this year, but there is a chance (33%) of at least three more hikes in 2018.

Wall Street analysts will be watching Fed Chair Jerome Powell’s speech on Tuesday for any clues as to how fast the Fed may hike. This week, the economic calendar is relatively light except for an update on consumer price inflation. Earnings season is mostly over, and the results have been very good. About 81% of large companies beat earnings expectations, and profits were about 24% higher compared to last year. There are only 41 large companies reporting earnings this week with Disney topping the list. 

The Trump administration sent a trade a team to China at the end of last week to try to find common ground on negotiating a trade deal. Not surprisingly, there was no deal, but there was a pledge to keep talking. Analysts will be wondering if there was enough progress for the Trump administration to delay tariffs on $50 billion of Chinese goods that can be applied on May 22.

The Simply Money Point

The economy is on firm footing and we should see healthy growth around 3% this year. However, stock market volatility could continue until there is a trade deal with China. Since the bull market began in March 2009, there have been three other periods where large company stocks experienced a decline of at least 10%. The average time once stocks started to fall before they recaptured their previous high was about 10 months. Patient investors, who focused on their personalized financial plan and not normal market noise, were rewarded each time.


Topics: Economics


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