US unemployment of 6.52 million in October has almost converged with the number of job openings (vacancies) in the economy, of 6.09 million in September. If the unemployed had the right skills and / or were in the right location, almost all would be in jobs. This is a reasonable definition of “full employment”.

The unemployment rate of 4.1% (4.07% before rounding) compares with a job openings rate of 4.0% (3.98%)*. The gap between the unemployment and job openings rates has fallen below 0.5 percentage points (pp) on only four occasions since the early 1950s – 1955, 1965, 1972 and 1999**. All four instances were followed by a rise in unit labour cost growth. Between the month when the gap fell below 0.5 pp and four quarters later, annual growth of non-farm unit labour costs rose by 6.7 pp, 3.6 pp, 5.0 pp and 2.7 pp respectively.

In 1955, 1972 and 1999, the unemployment rate converged with the job openings rate but did not fall below it. The economy subsequently weakened, the gap rewidened and the rise in unit labour growth was reversed.

In 1965, by contrast, the unemployment rate fell well beneath the job openings rate and a negative gap was sustained through 1970. Annual unit labour cost growth moved up from around zero in 1964-65 to 4% over 1966-68, with a further ratchet higher to 7% in 1969 – see first chart.

Developments since 2012 echo the first half of the 1960s, with annual unit labour cost growth remaining weak despite a steady narrowing of the unemployment rate-job openings rate gap – second chart. The gap fell below 0.5 pp in April 2017, suggesting – based on the historical experience – a rise in unit labour cost growth by mid-2018.

Faster unit labour cost growth would put upward pressure on (core) inflation and downward pressure on profit margins. Either would be negative for markets but the balance would affect the relative attraction of equities and Treasuries. A scenario in which margins took more of the strain, for example, would imply deteriorating economic prospects and rising recession risk, suggesting support for Treasuries despite a near-term inflation increase. Margins have fallen back since 2014 but remain elevated by historical standards – third chart.

*Unemployment rate = unemployment as percentage of employment plus unemployment. Job openings rate = job openings as percentage of employment plus job openings.
**Job openings data from December 2000 from Bureau of Labor Statistics; earlier data based on composite (i.e. print plus online) help-wanted series estimated by San Francisco Fed economist Regis Barnichon.

Posts in the spring and summer suggested that US economic growth would pick up into early 2018 based on 1) a rise in six-month real narrow money growth into August, 2) an expected upswing in the Kitchin stockbuilding cycle into the first half of 2018 and 3) a loosening of bank credit supply as the negative impact of a temporary tightening of funding markets in 2016 reversed.

The forecast of a positive impulse from bank credit supply is supported by the Fed’s October survey of senior loan officers. An average of the net percentages of banks tightening credit standards across various loan categories (commercial and industrial, commercial real estate, residential mortgages and consumer) fell further, consistent with rising near-term GDP momentum – see first chart.

As previously explained, looser bank credit is temporarily masking the negative economic impact of earlier Fed rate hikes. The danger is that apparent economic resilience will cause the Fed to overtighten over the next six to 12 months, laying the foundation for a recession in 2019-20.

The suggestion that the stockbuilding cycle remains positive for near-term economic prospects, following a 0.7 percentage point contribution to third-quarter GDP expansion of 3.0% annualised, is supported by a further decline in the ratio of inventories to sales in the three months to end-September – second chart.

Six-month real narrow money growth fell back sharply in September, suggesting that economic momentum will peak in early 2018. Weekly data through 23 October, however, indicate a partial rebound last month – monetary trends are not yet giving grounds for pessimism about economic prospects for later in 2018.