Taking a look at flows, I think we have a mixture of new cyclical trends and some statistical noise. The readings this month will depend on how much we are seeing of each. Net flows from NtoU have been low over the past year. The increased rate of decline in unemployment over the past year has been roughly divided between a decline in net NtoU flows and an increase in net UtoE flows. This is visible in the slopes of the trendlines. As the recovery matures, net NtoU will probably settle in at about 0.1% per month and net UtoE will settle in at about 0.15% per month.
While net NtoU has declined, net NtoE has improved. Essentially, workers who were out of the labor force are now more likely to re-enter the labor force with a job. This is a very strong sign. This flow has never had a positive moving average during the 25 years of data that we have, so the recent trend has been very strong. I wouldn't expect this flow to have a sustained level above -0.05%, and that would be the sign of a very strong labor market. This flow doesn't really affect unemployment directly, but it does indirectly. Normally, this late in a recovery, the number of unemployed workers would be at full employment levels, so we would see a decline in the net UtoE flow and a strong economy would be pulling the net NtoE flow up as marginal or opportunistic workers enter the labor force. In this economy, the countervailing flow may be a reduction in net NtoU instead of a reduction in net UtoE. The level of unemployment as we end the year will reflect this unknown. I suspect that we will continue to see strong net UtoE flows because of the continuation of re-employment patterns we have been seeing in the unemployment duration data, the positive unemployment insurance trends we have been seeing, and the continuing improvement in JOLTS data (hiring, job openings, and quits).
|thousands per month (slope)|
Also, the EtoU flow has remained fairly flat for the past couple of years, despite significant declines in insured unemployment rates and initial claims. Previously, when unemployment claims were at current levels, this flow tended to be about 0.1% lower.
And, we can see in the durations data that last month's unemployment seems to have come in high, as 3 of the categories were up with no apparent cause.
My gap down didn't happen last month, but I'm sticking with my story. I think there is a good chance of seeing a move down to 5.8%-5.9% in the reported unemployment rate for August. As the employment market settles into more stable late-recovery patterns and the cohorts of unemployed that are being re-employed more quickly continue to move out further into the long-duration category, we will see the unemployment rate drop 0.2-0.3% over the remaining 4 months of 2014, leaving us at 5.5% to 5.7% in December. I believe my forecast from earlier in the year remains accurate, and that we could see most of that gap taken out in August.