Mark Vitner

November is National Veterans and Military Families Month, which recognizes and honors veterans, active-duty military members and their families. The month marks the continuing evolution of Veterans Day, which initially honored service personal that served in wartime. Today Veterans Day honors all former service members and Military Families Month honors the sacrifices military families make each year that are particularly noteworthy around the holidays.

The origins of Veterans Day date back to the Armistice that ended hostilities in World War I at 11 am on November 11, 1918 – the eleventh hour of the 11^th day of the 11^th month. Armistice Day was honored one year later, with ceremonies and parades that continued informally. Congress passed a resolution in 1926 proclaiming that the “recurring anniversary of [November 11, 1918] should be commemorated with thanksgiving and prayer and exercises designed to perpetuate peace through good will and mutual understanding between nations” and asked that the president issue a proclamation each year calling for observance of Armistice Day. The Day did not become a national holiday, however, until June 1, 1938.

The ranks of veterans swelled tremendously following the massive mobilization of troops to fight World War II, more than 16 million, and the Korean War, around 5.7 million people.  Soon afterward, veterans’ groups lobbied congress to amend the 1938 Act to replace the word Armistice with Veterans. President Eisenhower signed this legislation into law on June 1, 1954. Veterans Day then honored veterans of all wars.

Congress passed the Uniform Monday Holiday Act in 1968, which moved four federal holidays (Washington’s Birthday, Memorial Day, Veterans Day, and Columbus Day) to Mondays. The move was designed to provide federal employees with three-day weekends and encourage travel and tourism. Many states objected to the change, however, as Veterans Day was supposed to commemorate a particular day, and hour for that matter. In 1975, President Ford signed legislation moving Veterans Day back to November 11 beginning in 1978. From that point on Veterans Day honored all veterans, whether they served in wartime or peacetime.

Military Family Appreciation Month, initiated by the Armed Services YMCA in 1996, serves to honor the sacrifices of military families. Since then, the United States government has consistently recognized this occasion, with the President signing a proclamation each year, officially designating November as Military Family Month. This month is dedicated to acknowledging the daily sacrifices made by military families, who confront distinctive challenges such as enduring extended deployments, frequent relocations, and managing long-term physical and emotional challenges.

The nation currently has 18.4 million veterans and 1.3 million active-duty service members.  In addition, 800,000 people currently serve in the reserves. Gulf War-era veterans now account for the largest share of all U.S. veterans, having surpassed Vietnam-era veterans back in 2016. As of 2022, Gulf War-era veterans include 3.2 million veterans that served from August 1990 to August 2021 (Gulf War-era I) and 4.9 million that served from September 2021 to present (Gulf War-era II).

The unemployment rate for veterans has consistently remained between one-half and a full percentage point below the unemployment rate for persons that did not serve in the military. Unemployment rates for White and Black veterans were lower than for their nonveteran counterparts in 2022, while the jobless rate for Asian and Hispanic veterans was not statistically different from their nonveteran counterparts.

There are a variety of reasons why the unemployment rate is lower for veterans. For starters, a disproportionate share of veterans are employed by the federal government, a sector less vulnerable to swings in the business cycle. Veterans also tend to be older than the general population, which translates into less turnover. The skills learned in the military are also more valuable to private sector, particularly for older vets.

Demographics also explain a large part of the lower unemployment rate. This largely reflects the still large population of World War II, Korean War and Vietnam-era Vets, which numbered just over 6.2 million in 2022, all of which are age 65 or over. Most Vets from this era are no longer in the workforce, and many have retired to warmer climates that have an abundance of military facilities that can be used by Vets. With so many veterans out of the workforce, the overall labor force participation rate, which is the proportion of the civilian population that is either working of looking for work (47.9%), is nearly 17 points lower than it is for nonveterans.

The unemployment rate for younger veterans is higher than for nonveterans. The jobless rate for veterans aged 18 to 24 in 2022 was 8.8%, a full percentage point higher than for their nonveteran counterparts. The unemployment rate for veterans aged 25 to 34 was 4.0%, roughly even with those that did not serve in that age group. Among prime working age persons, the unemployment rate for veterans is lower than for their nonveteran counterparts even though labor force participation is higher. The jobless rates for veterans aged 35 to 44 (2.3%), 45 to 54 (2.2%) and 55 to 64 (2.3%) are all below their nonveteran counterparts.

The lower unemployment rates for prime working age veterans is even more striking as it has come along with higher labor force participation. The labor force participation rate for prime working age veterans (age 25 to 54) was 83.2% in 2022, compared to 82.4% for nonveterans. Labor force participation for Vets aged 65 and over was just 15.3% in 2022, 4.6 percentage points lower than for their nonveteran counterparts.

Military retirement benefits earned by veterans undoubtedly contribute to the lower labor force participate rates for older veterans. Many have retired to states in warmer climates that also maintain a large military presence, including Florida, Texas, California, Georgia, Virginia, and the Carolinas. Florida and Texas do not have an income tax, which allows retirement dollars to go further. The Northeast and Midwest are also home to a large contingent of veterans, many of which are now retired.

The influx of military retirees is a stabilizing influence for local economies. Military retirement payments continue both in good and bad economic times. Veterans also provide local economies with valuable skill sets that are put to use in the labor force or in volunteer work. The benefits of military retirees have prompted many states to exempt military retirement pay from state income tax, hoping to put their states on a better footing to compete with Texas and Florida for the large pool of military retirees. Among the 42 states that have an income tax, 26 do not tax military retirement pay and 9 others only partially tax military pay.

Avoiding taxes is not the only reason veterans locate in one state or another. The climate, availability of resources provided to veterans and cost of living are also important variables. Prime working-age veterans also tend to locate where they have a relative abundance of job opportunities. Virginia, Maryland, Alabama, and North Dakota are notable standouts on this front. All four states boast unemployment rates for veterans that are below 2%, despite having significantly higher labor force participation rates for veterans. North Dakota had the lowest unemployment rate for veterans in 2022 at just 0.7%, with 55.5% of veterans in the workforce. Virginia has the highest share of veterans in the workforce, at 59.7%, which is more than 10 percentage points higher than the national average of 47.9%.

One thing all four states have in common is that the federal government is a major employer in the state. Veterans are much more likely to work for the federal government than nonveterans, with 10.8% of veterans working for the federal government in 2022, more than five times more than nonveterans (2.1%).

Employment of veterans at other levels of government is similar to nonveterans, with 4.6% (the same as nonveterans) working in state government and 7.4% (1 percentage point more than nonveterans) working in local government.

The prevalence of veterans in government is due to the unique skill sets veterans bring to the job. While workers in combat specialty positions may have few direct skills transferable to the private sector, the ability to follow instructions, complete a mission and be accountable is valuable in nearly every occupation. The military employs large number of workers in professional, scientific, and professional roles that are particularly sought out by federal government contractors that proliferate the areas surrounding Virginia and Maryland suburbs surrounding Washington D.C. and Alabama.

Other occupations military personal perform that develop skills easily transferable to the private sector include vehicle and machinery mechanics, transportation and materials handling, electrical and electronic equipment repair, health care, protective services, and construction. The skill set veterans bring to the workforce is weighted toward higher paying occupations. A higher share of veterans work in manufacturing, construction, and mining. In addition, an outsized share of veterans work in transportation and logistics and at utilities. Veterans are generally underrepresented in lower paying occupations, such as food services, retail trade, personal services and administrative positions in health care and private education.

The mix of jobs means working veterans earn slightly more than nonveterans. Nearly all the discrepancy is with women. Female veterans earn approximately 12% more than nonveterans, as fewer female veterans work in lower-paying occupations that tend to predominantly employ women, including many occupations in food service, retail trade, and lower paying occupations in health care and social services, such as childcare. Earnings for prime working-age veterans are slightly higher than nonveterans, primarily due to the larger proportion of workers in manufacturing, construction, mining, and government.  Veterans working in transportation and logistics and at utilities also tend to be older and more highly skilled and experienced, which means they are more likely to work in more highly compensated occupations in these sectors.

Just over 2.9 million Gulf War-era veterans have a service-connected disability, accounting for slightly over 60% of veterans with a service disability. Veterans with a service-connected disability are assigned a disability rating by the U.S. Department of Veteran Affairs or the Department of Defense ranging from 0 to 100 percent in increments of 10 percentage points. Among veterans with a service-connected disability, 23% reported a disability rating of less than 30%, while 50% reported a disability rating of 60% or more.  The numbers are slightly different for Gulf War-era veterans, with 19% reporting a disability rating less than 30% and a larger 55% reporting a disability rating of 60% or more.

Labor force participation for veterans with a disability rating of less than 30% is roughly equivalent to that of veterans overall, at around 77%, but well below the share of Gulf-War-era veterans without a service-connected disability (83.3%). The unemployment rate for Gulf War-era veterans with a service-connected disability is 3.6%, which is notably higher than for Gulf War-era veterans without a disability (1.9%).  Gulf War-era veterans with a disability rating of less than 30% have a higher unemployment rate (4.7%) than those with veterans with a disability rating above 60%, which was 4%. The reason for the lower unemployment rate is that a larger share of veterans with a disability rating of 60% or more are not in the labor force.

The military contributes mightily to the American labor market, with 1.3 million people serving in the active military and another 800,000 serving in the reserves. Moreover, the military employs some 730,000 civilian workers and about 500,000 civilian contractors. These numbers have come down considerably in recent years as U.S. involvement in wars has drawn down in the Middle East and Central Asia. Given the state of the world, we suspect the military will remain at its current size in coming years. In addition to the contribution of military personnel, approximately half of veterans are married and 40% have children. Military families make enormous sacrifices, dealing with frequent relocations and deployments, which are particularly notable around the holidays. Military spouses also endure higher unemployment and lower earnings on average. We honor that commitment and sacrifice in National Military Family Month.

Veterans also contribute significantly to the labor market, by adding a large number of skilled workers that are sorely needed in a variety of occupations. Prime working-age veterans participate in the labor force in roughly the same proportion or more than those that have not served in the military and tend to earn slightly more. The gap largely reflects the older average age and greater work experience of veterans as well as the prevalence of employment in higher paying occupations. Most of the pay differential is for female vets, a much lower share of which work in lower paying occupations than non-vets. Gulf War-era veterans with a service-connected disability also continue to contribute to the labor market, with those with a disability rating of less than 30% participating in the labor force at the same rate as veterans overall, and 61.8% of Gul-War-era veterans with a disability ratio 60% or more either working or actively looking for working.

The number of veterans will decline from 18.4 million today to around 12.5 million over the next 25 years, reflecting the passing of World War II, Korean War and Vietnam-era veterans, as well as the smaller size of the U.S. military. Vietnam-era veterans are all currently over 65. The share of female veterans will increase over the next 25 years, rising from its current 11% to around 17.5%.

We have updated our forecast to include the latest GDP data. Real GDP growth topped most estimates during the third quarter, with consumer spending rising at a 4.0% annual rate. The increase reflects a surge in spending for travel and leisure, which is unlikely to carry forward in the current quarter. Overall growth is expected to moderate in the current quarter and decline modestly during the first half of 2024. Slower economic growth will keep the Fed on hold, even though inflation will remain above the Fed’s 2% target.

The third quarter ended on a strong note, with employers adding 336,000 jobs in September and hiring during the prior two months revised higher by 119,000 jobs. Data on consumer spending, factory orders, and output all continue to show remarkable resiliency, given higher interest rates and tightening credit conditions. We have slightly raised our estimate for Q3 real GDP growth to 3.8% and the risks are weighted toward the upside. Our first look at third quarter GDP will come just ahead of the October 31-November 1 FOMC meeting.

At first blush, the unexpected surge in September job growth diminishes chances of a soft landing, or any landing, and increases the odds of another hike in the federal funds rate. Prior to the September jobs data, Fed officials had been arguing that labor market conditions were cooling off, fueling hopes of a soft landing.

The 119,000-job upward revision to the July and August employment data ended a string of downward revisions to the initially reported overall job figures for every month this year. The downward revisions helped feed the Fed’s narrative that the labor market was losing momentum. At first blush, September’s stronger jobs data came as an unpleasant surprise to the financial markets, particularly following reports of a sharp rise in job openings in the August JOLTS data and continued low readings for weekly first-time unemployment claims.

Upon closer inspection, September’s jobs report was not quite as strong as the headline rise suggests. While job gains were broad based, the bulk of job growth continues to come from industries still striving to bring their payrolls back to their pre-pandemic trend. Leisure and hospitality accounted for the largest block of jobs added in September, with hiring at restaurants and bars finally getting back to its February 2020 pre-pandemic level. Many restaurants remain chronically understaffed, however, and industry employment is about 450,000 jobs shy of where it would be today if it had continued to grow at its pre-pandemic pace.

Employment in health care and social services also lags considerably behind its pre-pandemic trend and continues to account for a disproportionate share of monthly job growth. Many of these are doctors’ offices and outpatient care facilities. Nursing homes, home health care agencies and hospitals are also adding staff.

Hospitality and health care employment tends to lean heavily toward women, and the recent strength in hiring in these two sectors helps explain the recent strength in female labor force participation. Many of the jobs being created at restaurants and health care are relatively low paid, however, which is one reason why average hourly earnings have moderated in recent months. The heavier mix of lower paid jobs means stronger overall jobs gains will provide less of a boost to income and spending.

State and local government is another sector where employment is still playing catch up. All the upward revision to the July and August payroll figures was due to more jobs being created than first reported by state and local governments, many of which were in education. We suspect the wide swings in education payrolls during the normally light summer months are due to pandemic-related distortions to seasonal adjustment. Some of the growth, however, reflects the rehiring of administrative positions and support staff, both of which remain historically understaffed. Private-sector payroll growth was revised modestly lower in July and August and has been revised lower every month this year.

There are likely more downward revisions to come. The Bureau of Labor Statistics released the Quarterly Census of Employment and Wages data in August that is the source data for the annual benchmark revisions reported early each year with the January jobs data. We estimate job growth from April 2022 to March 2023 will be revised down by about 310,000 jobs.  By contrast, job growth was revised up by more than 500,000 jobs when the annual revisions were released in February.

While the impeding revisions data only cover the period up to March 2023, we suspect job growth has slowed further since then. The weaker trend is consistent with both the string of recent downward revisions to the preliminary employment data as well as data from the Labor Department’s Household Survey, which is used to compute the unemployment rate. The BLS publishes a series that reconciles the differences between nonfarm employment, which comes from a survey of employers, and the household survey, which comes from a smaller and sometimes more volatile survey of households.

The adjusted household employment data show hiring has been more modest than has been reported by the nonfarm employment series. Moreover, adjusted household employment declined slightly in September.  Once the nonfarm data are fully revised, the two series have generally tracked one another very closely. The bottom line is job growth has likely not been as strong as has been reported and is still losing momentum, despite the strong headline-grabbing September job gain reported in early October.

Even after thoroughly dissecting the jobs data, there is no denying the economy grew strongly during the third quarter. Our point estimate calls for real GDP to rise at a 3.8% annual rate during the third quarter, which would mark the strongest gain in more than a year. The risk is clearly to the upside. The Atlanta Fed GDPNow has Q3 real GDP rising at a 4.9% pace. Consumer spending clearly grew solidly, rising at a 3.8% pace or better. Business fixed investment also grew solidly, and the nation’s trade deficit improved as imports slowed. Government spending also likely grew more rapidly, given the large upward revision to government payrolls.

While third quarter real GDP growth is widely expected to have been remarkably strong, most of the strength appears to have been at the start of the quarter. Expectations for current quarter economic growth are much more modest, with the consensus estimate for Q4 real GDP growth centered at a 1% annual rate.

Economic headwinds were widely expected to intensify in the fourth quarter of this year, even before the shocking attacks on Israel. One long running issue is how consumers will react to the restart of student loan repayments, which is likely to impact as much of 10% of all consumers. Higher interest rates are also likely to produce more of a direct drag on growth, as fewer consumers qualify for mortgages and car loans and more businesses have trouble securing financing or rolling over debt.

One thing we have learned in following the economy over recent decades is to never underestimate the US consumer. Consumers should have the wherewithal to weather economic headwinds. Personal income grew strongly during the third quarter and revisions to the previously reported data show consumers, overall, still have considerable pandemic-era savings remaining.

While we are optimistic about consumer spending, we have a few concerns. For starters, most of the remaining pandemic-era savings are at upper-income households, who tend to spend a smaller proportion of their incomes. Savings for families earning the median income or less, which is half the households in the country, have largely depleted any savings built up during the pandemic and are now facing the winding down of pandemic-era income support programs. These families are also being impacted more significantly by higher food and energy prices, which has led to increased credit use. Credit conditions are now tightening, as delinquency rates for auto loans and credit cards have risen back above their pre-pandemic levels for younger households and sub-prime borrowers.

Somewhat surprisingly, the resumption of student loans is not at the top of our list of concerns. We expect repayments to surge initially, as higher income borrowers repay their loans to avoid accumulated interest charges. For the bulk of borrowers, however, repayments will be more closely tied to annual incomes and be more manageable. The income diverted to student loan repayments will come from savings and some pull back in discretionary purchases, such as restaurant dining, concerts, sporting events and travel.

Higher interest rates are less of an immediate threat than they have been in the past. To be certain, higher interest rates will further restrain home sales. Mortgage rates surged to nearly 8% this past month, triggering a spike in contract cancelations for new and existing homes, as many would-be buyers no longer qualify for a mortgage or simply cannot make the numbers work. For homeowners that already own a home, however, rising mortgage rates are less of an immediate concern. Just over 42% of homeowners own their home outright and have no mortgage, while more than 80% of homeowners with a mortgage have a mortgage rate that is fixed below 5%. Another 60% of homeowners with a mortgage have a mortgage rate fixed below 4% or and more than 22% have a mortgage rate below 3%.

The preponderance of low-rate mortgages is one of the reasons households accumulated so much home equity during the decade leading up to the pandemic. Households have built up a near-record $31.6 trillion in equity through the second quarter of this year, the second highest total ever. Much of that equity was built up prior to pandemic and the more recent surge in home prices. The Global Financial Crisis led to a slew of mortgage refinancing at between 3% and 4%, many of which were 15-year fixed rate loans refinanced under the HARP program in 2010 and 2011. Many of those loans are now approaching maturity, which will add significantly to the share of homeowners that own their homes outright.

Many businesses are also insulated from higher interest rates, at least in the short term.  Many firms were able to lock in financing when short-term interest rates were near zero and the Fed was providing extra liquidity to the bond market during the height of the pandemic. While debt maturities will begin to ramp up next year, much of this debt carries low rates and will not mature until 2025 or later. The average rate on corporate bond debt is currently around 4%.

Given the economy’s surprising resilience this summer, the Fed might be inclined to raise interest rates a bit more. Heightened geopolitical uncertainty in the wake of the horrific attacks on Israel, however, will likely keep them on the sidelines, even if the economic data come in stronger ahead of the November FOMC meeting. We are concerned the inflation numbers might come in hotter than expected due to the recent rise in food and energy prices, as well as some catch-up in core services prices, which were suppressed by seasonal adjustment this past summer. Third quarter GDP growth could also easily top already lofty expectations. If September personal consumption also comes in strong, expectations for fourth quarter economic growth would increase, which might force the Fed’s hand in November.

We doubt the Fed will hike interest rates any more this year unless a rate hike is already priced into the bond market.  Yields have come down in the wake of comments from Fed officials discussing the uncertainty about whether the lags between interest rate increases and their impact on the economy have lengthened, or possibly even weakened, due to the preponderance of fixed-rate debt locked in by households and businesses when interest rates were near zero. That low fixed rate debt is what contributed to losses in the banking sector earlier this year and even at the Federal Reserve, which were a big part of the initial drag on Gross Domestic Income.  Higher interest rates are transferring wealth from lenders, who are holding fixed-rate mortgages and mortgage-backed securities, to borrowers that locked in ultra-low rates. This transfer of wealth appears to be insulating a substantial share of households and businesses from higher interest rates.

We see economic growth slowing over the next three quarters and envision a scenario somewhere between a soft landing and mild recession. Higher interest rates are having an impact on the most interest rate sensitive parts of the economy. Sales of new and existing homes are expected to decline modestly over the next 6 to 9 months, as the combination of higher prices and higher interest rates further reduces affordability. New apartment starts are expected to fall sharply, however, accounting for most of the drop in overall housing starts and apartment starts are likely to remain restrained through 2025 due to rising vacancy rates.

Consumer spending will slow but continue to increase on an overall basis. Slower job growth and tightening conditions will reduce big-ticket purchases, with light vehicle sales declining by about 1 million units. We see job growth remaining modestly positive, which is why we are reluctant to label the back-to-back declines in real GDP expected at the start of 2024 as a recession. Even construction employment should hold up reasonably well, due to the unusually large number of homes currently under construction.

Higher interest rates are also making it more difficult for startups and companies that have a long or uncertain path to profitability to raise capital, slowing business fixed investment. Overall nonfarm payroll growth is expected to decelerate to just under 100,000 jobs a month, which will nudge the unemployment rate up to 4.3%. This resiliency will make it harder to bring inflation back down to the Fed’s 2% target. Wages are rising at around a 4.5% pace, which translates into 3% inflation if productivity growth gets back to 1.5%. As a result, the Fed will be slow to cut interest rates even as economic activity slows.