Is There More Slack in The US Economy Than is Generally Percieved?

Recent inflation fears have helped lead to a sell off in bonds. From a total return perspective, the 30-year US treasury has declined by 13% and the 10-year US treasury has declined by 6% over the past 100-days. With the prospect of fiscal stimulus on the horizon while the official US unemployment rate is sitting at nine-year lows, it is understandable that investors are getting antsy about inflation. We believe, however, that there is still plenty of excess capacity in the economy and that could keep a lid on inflation.

As we mentioned, the official U-3 unemployment rate is just 4.6% which is the lowest levels since August 2007. However, the broader U-6 unemployment rate still stands at a 9.3%. In the previous two cycles, the U-6 unemployment rate fell below 8% and was as low as 6.9% in 2000. The spread between the U-6 and U-3 unemployment rates remains elevated relative to recent history as well.



The employment to population ratio is also below peaks in prior cycles. The employment to population ratio of 25-34 year olds is 77.4% well below previous highs of 80% in 2007 and 82.3% in 2000. The employment to population ratio among 35-44 year olds is 79.5% down from 81.5% in 2007 and 82.6% in 2000. Finally, the employment to population ratio of 45-54 year olds hold is 77.6% compared to 79.7% in 2007 and 81% in 2000.