US labour market tightening further

Despite the moderation in growth in the US economy, the slack continues to decline rapidly. The short-term unemployment rate, which seems to matter most for wage growth, is back to the levels seen during the 2006-2007 boom years, and while long-term unemployment and part-time employment are still elevated by historical standards, there has been significant improvement in recent quarters.

The combination of moderate growth and rapid labour market tightening reflects weakness on the supply side. Thus, as both productivity and labour force growth have slowed in recent years even moderate growth would be enough to absorb any further slack in coming quarters. The potential growth is around 1¾-2% annually, down from around 2½% in the years prior to the recession but still significantly above zero, says Nordea Bank. 

According to Nordea Bank, employment gains is likely to continue to substantially outpace trend labour force growth during the forecast horizon, thus, the unemployment rate to reach 5%, below the Fed's NAIRU estimate (5.1%), by end-2015 and 4.7% by end-2016. Anything over 125k jobs per month will keep the unemployment rate trending down unless the participation rate starts increasing sharply.