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Financial Industry Insights from Advisors Asset Management
On February 08, 2016
AAM Viewpoints – Broad Improvements in the Labor Market
Unfortunately it is all too common for many media outlets and their pundits to find a nugget of breaking news that often contradicts their earlier soundbites. The release of the payroll report on Friday, 2/5/16, was no different. I was listening to a well-known radio host explain to his audience how the employment numbers are manipulated to such extent that they are meaningless. The host vociferously proclaimed that the United States could not possibly be adding jobs while the number of people in the labor force was declining.
One of our primary missions at Advisors Asset Management has always been to provide intelligent insight into the current economic environment. The U.S. economy is complicated and robust and this unfortunately doesn’t make for headline-grabbing soundbites. This issue of AAM Viewpoints is intended to put in context some of the widespread doubts regarding the labor market. At the same time, I wonder how someone like Louis Rukeyser would look at the state of financial reporting today.
The Labor Force Participation Rate (LFPR) is a percentage of working-age people who are 1) employed and 2) unemployed but looking for a job. Some may call into question this method of measurement as it doesn’t capture those people who have stopped looking for a job but in the name of brevity, we won’t address this strawman at this time.
As far back as 1971, many questions were being asked about the long-term effects of the baby boomer generation entering the workforce and what would happen when they began to retire (Easterlin, Wachter & Wachter – 1977, Fair & Dominguez – 1991). The magnitude of the baby boomer generation was certain to have some effect, the question was how much of an effect it would have.
The chart below plots the total percentage of working-age people in the labor force (green) as well as people ages 25-54 (blue) and 55+ (red). As you can see, the broad labor force participation peaked at 67.10% in 1998 and has been generally declining since early 2001. As a result of a broadly declining birthrate that reached an all-time low in 2011 (Pew Research Center, 2013), the number of workers entering the workforce is markedly less than those who have reached retirement age. While this appears clearly in the data and historic analysis, the secular change in the labor force is often conveniently left out of the two-second soundbites we hear in the media.
Source: St. Louis Fed
Other studies have dug a little bit deeper into the decline in the labor force participation rate and attempted to determine if the decline is more than simply demographics. Recently Willem Van Zandweghe, Senior Economist from the Federal Reserve Bank in Kansas City published analysis in which he attempts to decompose the decline in the LFPR into secular and cyclical factors (Economist Review, Q1 2012). Van Zandweghe finds that approximately 50% of the decline it the LFPR since 2001 is the result of demographic forces, the other 50% is from cyclical factors.
So while a secular decline in the LFPR has been expected, it is clear there are also cyclical factors at work which have contributed to the decline. There is evidence that these cyclically displaced workers are re-entering the workforce and, while I won’t spend time on the strength of December’s Payroll Report, it is astounding that the U.S. economy added an average of 222,000 jobs through 2015. In addition, the economy has added 200,000+ jobs or more each month since April 2014. We have not seen jobs added consistency at this level since the expansion of 1991 – 2001.
It is of further interest to consider the sector breakdown of the number of jobs being added. Below is a chart of the percentage of jobs added, by major sector, since 2011.
Source: Bureau of Labor Statistics
While it is common refrain to hear the lament of the loss of goods producing jobs in the United States, the composition of jobs added in goods-producing sectors during this expansion is nothing short of remarkable.
1982-1990
1991-2001
2001-2007
2009-2016
Average from 1980
Goods
5.78%
7.04%
7.03%
20.26%
19.70%
Services
79.87%
75.88%
95.01%
68.94%
72.12%
Government
14.35%
17.07%
-2.03%
10.80%
8.18%
We believe it is important to focus on not only the composition of hiring but also on wages. Some of our recent concern regarding wages is the result of the excess capacity in the 25 – 54 age bracket, the prime working age group. However, December’s employment report shows that employment in this age cohort expanded by the largest amount in 25 years. We feel this is a clear sign that some of the excess capacity is being reduced.
While the boisterous admonitions of many media outlets dominate the headlines, we feel it is important to remember that the labor market remains subject to the forces of supply and demand. Wages are the price being charged by the suppliers of that labor and a lower supply of labor leads to higher prices. On Friday morning, Bill McBride also pointed out that wages are clearly trending higher.
While we may see wages continue to improve, we feel the rally in the U.S. dollar has already created ample tightening and therefore the Federal Open Market Committee may be on hold in the near term. But, as 2016 develops we will all be keeping an eye squarely on wages. A continued reduction in excess labor capacity leads to higher wages and regardless of how loud the naysayers are, the data clearly shows labor markets are continuing to move in the right direction. The well-worn refrain from many market pundits is that the labor market recovery is weak and transient. However, we feel these comments tend to be light on accurate analysis and may not be advantageous to an intelligent investing strategy.
CRN: 2016-0201-5144R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at https://www.aamlive.com/legal/commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.
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