On Dec. 12, the Federal Reserve announced an official employment target along with its more traditional goal of controlling inflation. It announced that short-term interest rates would remain around zero until unemployment drops to 6.5% or lower.
The steady decline in the unemployment rate, which peaked around October 2009 at 10%, is welcome news for the economy and demonstrates how job availability continues to grow. The rate hovered above 8% for 42 straight months, the longest streak since the Great Depression, but continues to come down as the economy recovers from the Great Recession.
Slow but Steady
In a recent speech, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, provided insight into the economy and recent job growth trends. He pointed out that the U.S. economy has been growing at about 2% since the official recovery from the Great Recession began just over three years ago. He described this as "slow-growth mode" and a primary reason that unemployment remained stubbornly above 8%. This is well above the pre-recession low of 4.4%, which occurred in May 2007, and just before the housing bubble burst.
The fact that the unemployment rate has dipped below 8% is highly encouraging. Lockhart attributed the recent strength in large part to improvements in the housing sector. By many measures, the housing market has bottomed and reached a bonafide recovery mode, as evidenced by the clearing of inventory in important markets such as Miami and key coastal areas in California. Housing growth is expected to help the economy grow, which would allow the unemployment rate continue to drop.
Another industry that continues to impress with rising and sustainable job availability is energy. The boom in hydraulic fracturing, or fracking in short, has allowed for a renaissance in U.S. oil and gas exploration and production. In particular, natural gas supply remains plentiful, with enough to satisfy domestic demand and leaving huge potential for natural gas exports to supply-constrained regions such as Japan and Europe.
The Fed's more specific unemployment targets include a rate as low as 7.4% by the end of 2013, between 6.8% and 7.3% in 2014, and in a range of 6% to 6.6% by the end of 2015. Clearly, these are baby steps and unlikely to be achieved steadily. They also demonstrate just how slow this recovery is progressing. If these targets are achieved, it will have taken around six years for the economy to recover. Yet the unemployment rate will remain a couple of percentage points above its pre-peak levels.
The automotive industry also continues to show strength and add jobs. A recent article on Yahoo! Finance suggested that automotive giant General Motors is only finding 500 qualified candidates to fill 2,500 available positions for auto technicians. The trucking industry also remains understaffed and will need an estimated 330,000 workers over the coming decade to fulfill demand for shipping goods across the U.S. Similarly, railroad demand remains strong. Any cyclical industry will likely continue to see a boost if the economy remains in recovery mode and employment trends continue to improve.
The Bottom Line
The Fed's move was bold and somewhat unprecedented. Federal Reserve Chairman Ben Bernanke has spoken of the Fed's desire to boost employment along with controlling inflation for some time, but to offer specific details on employment levels is a truly new endeavor. The Fed may receive criticism for keeping monetary policy too loose and potentially stoking inflation and an overheating economy down the road, but that would actually be a nice problem to have and tackle as it would demonstrate the economy has fully recovered from the Great Recession.
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