Unemployment May Fall Below 5%

It is entirely possible that the United States could add over 300,000 jobs each month. That would decrease the level of “unemployed persons” by a third from its current level of 9.1 million. The recovery of the economy, at least based on the unemployment level, would then be complete.

The last period when unemployment was below 5% was almost a decade ago. The jobless rate in 2006 was 4.6%. In 2007, it was the same. Both gross domestic product (GDP) and housing prices surged during that period and the years just before. Average GDP growth for the 2004 to 2006 period was well above 3%.

As the recession began and housing prices collapsed, the jobless rate rose to 9.3% in 2008 and 9.6% in 2010. In 2009, GDP contracted by nearly 3%. In some markets, home values fell by a third. In some areas, particularly parts of Florida and Nevada, home prices reset dropped by more than 50%.

A measure of how a strong economy can drive unemployment below 5% for years runs from 1997 through 2001. The best year for jobs during that period was 2000, when the jobless rate fell to 4%. Not surprisingly, GDP rose by over 4% per year from 1997 through 2000.

The foundation is in place for another several years of very low unemployment. GDP rose 5% in the third quarter. There are few reasons to believe that rate will fall much. Based on the jobs picture, retail sales, car sales and improving corporate profits, the GDP for next year should increase 3%. The collapse in gasoline prices, which could drop the price of driving in the United States by $75 billion, according to the AAA, is among the most important factors in the increase of GDP in 2015. The GDP may be even more affected with the inclusion of the prices of oil-derivatives used by businesses and the fall in jet engine fuel prices.

A jobless rate of under 5% by the fourth quarter is not just possible, it is likely.

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