A Job Market This Good Didn’t Seem Likely 3 Years Ago

With labor-market data for the 2010s behind us after Friday's employment report, the big takeaway for the decade is that a much higher level of employment was possible without generating inflation. President Donald Trump also has an argument to claim that not only is he presiding over the best labor market in decades, but also that the continued improvement is historic. This isn't to suggest his specific policy decisions deserve credit for the improvement — manufacturing weakness resulting from the trade war is clearly evident in 2019 jobs data. But during his administration, prime-age employment has increased faster over his three years in office than it has in decades — and it's happened without an acceleration in inflation.

Because a hallmark of this expansion has been the consistency of labor market and overall economic growth, it's easy to forget how improbable the current conditions seemed just three years ago. At the December 2016 meeting of the Federal Open Market Committee, the forecast for the end of 2019 included an unemployment rate of 4.5%, core inflation excluding food and energy of 2%, a federal funds rate of 2.9% and average real gross domestic product growth between 2017 and 2019 of 2%. As it turns out, policy makers underestimated both economic growth and the improvement in the labor market while overestimating inflation and the level of interest rates. Unemployment ended 2019 at 3.5%, a full percentage point lower than the estimate, while core inflation has yet to hit 2% on a sustained basis. Real GDP growth was 2.8% in 2017, 2.5% in 2018 and is likely to have grown more that 2% in 2019. And after the Fed's three interest-rate cuts in 2019, the fed funds target rate sits at 1.75%.