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With joblessness nearing record lows, the economy appears to be running strong. However, with fewer potential workers on the sidelines, the pace of job creation is inevitably going to slow over time.

Unemployment

The U.S. unemployment rate dropped to 3.7% in September, approaching its lowest point in nearly half a century. The last time the jobless rate was so low was in December 1969, shortly after bottoming at 3.4% a few months prior. Even at the peak of the 90s economic boom, unemployment bottomed at 3.8%. As can be seen in the chart above, unemployment numbers typically track closely behind initial jobless claims, which are also near 50-year lows.

The increasingly tight job market is making it more challenging for employers to find workers, and as a result, we are starting to see some upward pressure on wages. While this points to continued strength in the economy, it presents some risks as well. Job creation continues to be strong, but will naturally slow at some point as the number of available workers continues to dwindle. As job creation cools, continued economic growth will have to come from improved productivity, which has been relatively muted in recent years.

The bottom line is that the economy appears to be running strong and shows no signs of slowing down. In fact, the greater threat today appears to be of the economy overheating rather than stalling. However, just how long the current expansion can continue to run will be partly dependent on how long the job creation engine stays on track.

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