Unemployment expected to decline in the US on subdued productivity growth

The unemployment rate in the United States is expected to decline further in the near term on soggy growth in productivity amid weakness in the US labor market.

The US unemployment rate has stabilized at around 5 pct over the past 6 months. It is expected to sink further 4 pct and may fall even further, DNB reported.

"The implications for the Fed is that monetary policy will have to tighten and hence we forecast two interest rate hikes this year and another four hikes in 2017," DNB said in a research note.

However, the Federal Open Market Committee expects a stable rate of unemployment, assuming potential growth at 2 pct. Investment growth has been slow for several years. However, New technology (IR4) may have a positive effect and loss of profitability may increase efficiency in some sectors, like the energy sector.

Meanwhile, participation rates have picked up for core groups between 25 and 54 years, in particular the group between 45 and 54 years. For older and younger age groups rates are fairly stable.

"We forecast a relatively strong development in the labor force, a continuation of the trend seen in Q4 and Q1 (an elasticity of 0.6)," DNB stated in its research.

Further, if labor supply grows slower, the unemployment rate would fall further. An elasticity of 0.4 would reduce unemployment to 3.0 pct.