The alternative measure takes all non-employed people into account, splitting them into different groups that are weighted by their historical likelihood of transitioning into a job. For example, retirees have less than a 2% chance of jumping back in, while non-retirees who want a job have a higher likelihood. The alternative index is close to its 2005-6 levels, so it "tells a story similar to the unemployment rate — that the U.S. labor market has returned to full health," according to the report.
The mortgage-student loan tie
U.S. student loan defaults shot up during and after the Great Recession, and the crashing housing market might have played a significant role in that. That's because plummeting home prices coincide with lower consumer demand and disruptions in the labor market, impacting borrowers' ability to pay, according to research by New York University's Holger Mueller and Constantine Yannelis. The fall in home prices during the downturn accounts for about 24 to 32% of the increase in student loan defaults, they find.
R* on the rise?
Central bankers and policy watchers are fixated on r* — a fantastically nerdy name for the neutral interest rate setting that neither slows nor stimulates the economy. Many researchers say the number has dropped in advanced economies due to aging demographics and depressed productivity growth. If that's the case, it means the Fed and many other central banks have less room to increase borrowing costs, leaving less space to cut during the next recession.
Goldman Sachs economists think the doom and gloom may be overblown. They agree that the neutral rate fell substantially after the crisis, but they view the decline as more of a business-cycle quirk than a permanent situation. Among other factors, they point out that the labor market in advanced economies is outperforming expectations, which suggests that the recovery hasn't been as stagnant as growth numbers might suggest.
If they're right, it could mean that interest rates will go higher than many expect in this hiking cycle. "We expect the nominal funds rate to reach 3.25 to 3.5% at the end of 2019, significantly above current market pricing," according to their note.
by Jeanna Smialek, Bloomberg