There are a lot of good things to say, and few bad things to say, about the November employment numbers that were published Friday.
Employers added 266,000 jobs, a blockbuster number even after accounting for the one-time boost of about 41,000 striking General Motors workers who returned to the job. Revisions to previous months’ job counts were positive. The unemployment rate fell to 3.5%, matching its lowest level since 1969.
Other numbers were less evocative of a boom time. The share of the adult population in the labor force ticked down, and average hourly earnings continued growing at only a moderate pace, up 3.1% over the past year — but it feels churlish to complain when the big-picture numbers are so good.
Still, there is a bigger lesson contained in the data, one that is important beyond any one month’s tally of the job numbers: that the U.S. economy is capable of cranking at a higher level than conventional wisdom held as recently as a few years ago. As the economy continues to grow well above what once seemed like its potential, without inflation or other clear signs of overheating, it’s clearer that the old view of its potential was an extremely costly mistake.
The mainstream view of the economics profession — held by leaders of the Federal Reserve, the Congressional Budget Office, private forecasters and many in academia — was that the U.S. economy was at, or close to, full employment.
In January 2017, for example, nearly three years ago, the Congressional Budget Office forecast a 4.7% unemployment rate as far as the eye could see, and it projected that the U.S. labor force would consist of 163.3 million in 2019. The jobless rate has averaged less than 3.7% through the first 11 months of the year, and the labor force now stands at 164.4 million people.
The Federal Reserve likewise was too pessimistic about the potential of U.S. workers; in projections three years ago, the consensus view of its leaders was that the unemployment rate would average 4.5% in the final months of 2019. If that forecast had materialized, 1.6 million more Americans would currently be unemployed than actually are.
They also expected their target interest rate to be around 2.9% — reflecting rate increases they believed would be needed to head off inflation. Instead, that interest rate is around 1.6%, and you have to squint to see signs of inflation.
If you go back even further, to the late Obama years, there was an even more pessimistic tone about the outlook for U.S. workers embedded in the fine print of both public and private-sector forecasts.
If we knew then what we know now, it would have had big implications for what seemed like sensible policy. The United States probably didn’t need to reduce budget deficits the way it did between 2013 and 2016, now that we know how much untapped growth potential there was. The Fed probably didn’t need to raise rates as quickly or as much as it did.
There are clear signs that Fed leaders are starting to internalize these lessons, and are now more open-minded to letting the economy run and seeing just how many people can be put to work and how much wages can rise before it causes inflation or other problems.
And markets seem to be getting that message. For years, whenever there has been a strong jobs report like the one issued Friday, markets viewed it as hawkish for monetary policy — as tilting the balance toward more interest rate increases. But this time, analysts and financial markets seemed to take the big-time job growth numbers in stride, given that they weren’t accompanied by any signs of ill effects from the low unemployment rate and strong growth.
People often say that this expansion, now in its 11th year, is growing long in the tooth, or that we are late in the economic cycle. And maybe that’s right. But the biggest lesson when you contrast where the labor market stands at the end of 2019, versus where smart people thought it would stand just a few years ago, is that there’s a lot we don’t know about just what is possible and how strong the U.S. economy can get.