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Question #3 for 2025: What will the unemployment rate be in December 2025?

Calculated Risk
01 Jan

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2025. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I posted thoughts on those in the newsletter (others like GDP and employment will be on this blog). I'm adding some thoughts and predictions for each question. Here is a review of the Ten Economic Questions for 2024. 3) Unemployment Rate: The unemployment rate was at 4.2% in November, up from 3.7% in November 2023.   Currently the FOMC is projecting the unemployment rate will increase to the 4.2% to 4.5% range in Q4 2025.  What will the unemployment rate be in December 2025?

Seven years ago - back when most analysts said the unemployment rate couldn't go much lower - I noted that current demographics shared some similarities to the '60s, and that the unemployment rate bottomed at 3.4% in the '60s - and that we might see the unemployment rate that low or lower in this cycle. That happened.  

Note the period in the late '60s when the unemployment rate was mostly below 4% for four consecutive years.  That period ended in late 1969 with a recession.

Click on graph for larger image.

The unemployment rate is from the household survey (CPS), and the rate increased in November to 4.2%, up from 3.7% in November 2023.  

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate (previous question).

It appears that the participation rate will decline in 2025 based on demographics and that population growth will slow due to less net migration.  That suggests the possibility that the labor force might not grow in 2025 and might even contract!  So even if job growth slows sharply in 2025 (next question), the unemployment rate will fall.

My guess is the unemployment rate will decline to 4% or so by December 2025.  (Lower than the FOMC forecast of 4.2% to 4.5%).

Here are the Ten Economic Questions for 2025 and a few predictions:

• Question #4 for 2025: What will the participation rate be in December 2025?

• Question #5 for 2025: What will the YoY core inflation rate be in December 2025?

• Question #6 for 2025: What will the Fed Funds rate be in December 2025?

• Question #7 for 2025: How much will wages increase in 2025?

• Question #8 for 2025: How much will Residential investment change in 2025? How about housing starts and new home sales in 2025?

• Question #9 for 2025: What will happen with house prices in 2025?

• Question #10 for 2025: Will inventory increase further in 2025?

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