Unemployment Rate: What is Next After the Longest Drop in History?

We have data on monthly unemployment rates in the US from January 1948 - shortly after World War 2 - through September of 2017. During that time it has never been lower than 2.5% (which it was in May and June of 1953 at the peak of the post war recovery) and never been higher than 10.8% (which it was in November and December of 1982 in the depth of the Volcker-induced recession during Reagan's first term).

Half the time it is below 5.7% and half the time it is above 5.7%.

Unemployment rates of 3.8% or lower put you in the top 10%; rates of 7.9% or higher put you in the bottom 10%. 80% of the time, unemployment rates have bounced between 3.9% to 7.8%; that range defines normal. Outside of that range things are great or awful.

At the depth of the Great Recession - in October of 2009 - unemployment hit 10%. That's among the worst 1% of all months. (Well, in the worst 1.2%.) Since then it has steadily come down during the longest uninterrupted streak of job creation on record. Last month - the end of the streak - unemployment hit 4.2%, a value in the best 17%. We're in the top 20% but not yet top 10%, really good but still not great.

One simple answer as to whether unemployment will drop further is to say that it's only been lower than its current rate of 4.2% 15% of the time. Again, unemployment rates bounce between 4% to 8% most of the time; it doesn't seem to last long outside of that range. That alone suggests that the unemployment rate will soon stabilize or even rise.

Another interesting thing to note is that this is an exceptionally long recovery. Unemployment peaked 8 years ago this month - in October of 2009. A steady drop in unemployment has never lasted longer. The next longest improvement, the drop from the 10.8% high in December of 1982 to its low of 5% in March of 1989, took just over 6 years before beginning to rise again. Unemployment rates steadily drop for a time and then steadily rise, and steady improvements usually last just a few years, not 8 yerars.

At the start of a recovery people are well aware of all the reasons things can go badly. After all, they are just coming out of a period in which things did, indeed, go badly. Remember how early in the recovery people were anxious about Greece, China's stock market, deficit spending, the mortgage market, Greece, etc. People were looking for reasons that things could go wrong. Now? Now they're looking for reasons that the recovery could continue and less aware of reasons it might not; this makes economies more vulnerable.

There are reasons the unemployment rate could drop further and reasons it won't. 

Among the reasons it could drop further is that our labor force is growing more slowly than it did a decade ago. From 1955 to 2005, US labor force (folks aged about 25 to 65) grew 1.7 percent a year. Since then it has grown about 0.5%. As companies seek to hire, they'll have fewer options; all else being equal, this would translate into lower unemployment.

Another reason it could drop further is because of a drop in immigration. Again, this lowers the number of available workers and could mean that employers will draw from the unemployed rather than the newly available. If immigration rates drop enough, the labor force might even stop growing.

Curiously, the reasons that the unemployment rate could start to rise again include a drop in immigration. Immigrants don't just find work here. They buy houses, clothes, meals and all the things that drive demand for goods and services that, in turn, drives demand for employees here. If Trump's policies are successful at slowing down the flow of immigrants, he'll actually succeed at destroying jobs.

Trade, of course, could still provide jobs for American workers. Assuming, of course that Trump does not ignite trade wars. Simply put, he wants trade wars with our biggest trading partners - threatening to blow up Nafta and trade deals with China - and if he gets his way we'll see a drop in trade with our three biggest trading partners. That will destroy American jobs.

The third reason that the unemployment rate could rise is because Trump is planning to cut spending and taxes. Tax cuts will disproportionately go to the rich. If you give a poor guy a $1,000 in tax cuts, he's likely to spend $900 of it. When you're making only $30,000 a year, you could use that extra $1,000. If, by contrast, you give a rich guy $1,000 in tax cuts, he's likely to save $900 of it. When you're already making $500,000 a year, an extra $1,000 isn't going to change your vacation plans. Government spending ripples throughout the economy in ways simple (the employees of the State Department buy coffee at that little coffee shop across the street) and complex (the Medicare recipient pays a medical bill which enables the hospital to make a down payment on a new imaging technology and the young doctor to make a down payment on a new car). If you cut $1,000 in government spending and then give a $1,000 tax cut to someone rich, you'll reduce spending, reducing demand for the goods and services that drives demand for employees.

What is the punchline? It depends on whether Trump ends trade deals. In either case, unemployment rates are likely to start rising again within 3 to 9 months. If he ends trade deals, they'll begin to rise sharply.

If Trump fails to end trade deals:
Unemployment will fall to no lower than 3.8% within the next six months, after which time it'll start to rise again. Given drops in the growth of the labor force, job creation could turn negative at least one or two more months within the next year even as the unemployment rate remains relatively stable.

If Trump succeeds in ending trade deals like Nafta:
Unemployment will - at best - hit 4% near term but may have already bottomed out at the current 4.2%. We'll have a recession and the unemployment rate will rise to 6% to 8% within a year or two.