Adding Jobs Would Be a Steep Climb for Trump
Donald Trump wants to be a great jobs president. But the forces that really affect employment are beyond his control -- and they are working against him.
Over the long run, when it comes to job growth, demographics is destiny. The Reagan and Clinton presidencies, so strong economically, coincided with the baby boomer generation being in its peak years. Even the Carter presidency, remembered more for inflation and an energy crisis than for job growth, saw 10 million jobs created as young baby boomers flooded into the workforce. As baby boomers continue to age and retire, they'll represent a demographic headwind to job growth. In the 1990s, the U.S. economy needed to add about 200,000 jobs a month to maintain a stable unemployment rate. In the near future, it'll be more like 75,000.
If the long run is dictated by demographics, the short run is dictated by how much labor slack exists. How far we are from full employment? Over the last four years, even with more baby boomers retiring, the economy added 10 million jobs. This was possible not so much because the labor force grew as because more people who wanted to work were able to: The unemployment rate fell to 4.7 percent from 7.9 percent. However, we're now around the Federal Reserve's estimate of full employment. The Fed's longer-run estimate of the unemployment rate is 4.8 percent, a tick above where unemployment currently stands.
Putting those pieces together shows just how tough it'll be for Trump's first term to put up Reagan or Clinton numbers. Demographics suggest trend job growth will be around 75,000 a month, or 900,000 a year. And with a starting unemployment rate of 4.7 percent, there's very little room for cyclical improvement, especially with the Federal Reserve now planning on accelerating the pace of interest rate hikes.
Those hikes could lead to a recession at some point during a first Trump term. You have to go back to the 1960s to find a period when the unemployment rate stayed below 5 percent for four years or more. The median unemployment rate over the past 25 years has been 5.6 percent. A mild recession sending the unemployment rate back to that level is well within the realm of possibility. But if that happens, it'd mean annual job growth over the next four years of around 500,000, far short of the 2.5 million annual goal laid out by Trump.
And it may end up far worse. A recession could send the unemployment rate much higher than 5.6 percent. Restricting immigration, whether legal or illegal, would mean slower labor force growth and hence slower employment growth. And one behavioral dynamic to watch is what happens with employed baby boomers in their 60s at the onset of the next recession. Will they slog through a tough labor market, or are a significant number of them already just holding on, waiting for a buyout or severance from their employer? A wave of retirements at the beginning of a recession could clean up labor slack much sooner than we've seen in recent economic cycles.
The irony is that for workers, the outlook for the next four years looks pretty good. Trump is concerned about job growth numbers, but workers are concerned about wage growth -- and the numbers show they're already doing well. (Especially since the recession's nadir in 2009, Obama has had some forces working in his favor to drive down unemployment.) We're around full employment right now, and wage growth is slowly accelerating. Business investment looks set to pick up in 2017, housing construction growth continues to be steady, and there appears to be some appetite for fiscal stimulus and infrastructure spending. Baby boomer retirements should help keep the labor market tight and allow younger workers to get promotions and raises. It's just that these favorable labor market dynamics might show up in wage growth rather than job growth.
Trump had better hope that should this scenario play out, he will be judged more by how the economy feels than by whether it added jobs as he promised. Otherwise, he might be the one getting fired.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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