One of the last straws grasped by those who want to be pessimistic about the economy is to point to the declining Labor Force Participation Rate, a statistic put out by the government to measure the number of people working versus the total number in the adult age range. The most recent graph looks like this:
This graph is supposed to show how the economy is not providing jobs for the labor force.
The problem with the graph is that most people do not know how to interpret it. The labor force (the denominator number) is all citizens over the age of 15. The participants are all those who work for an employer of any size, based on questionnaires sent out by the Department of Commerce.
Two things immediately come to mind in terms of this graph. It includes all citizens over 15, which means it includes all persons over 65 who have retired. Given that there are two people retiring for every person entering the labor force, the decline in workforce participation rate is self-evident.
A second factor, more subtle but just as real, is that the data does not measure the self-employed, much less those who work for cash off the books. Recall, that you are counted in the survey only if you have employment in the services of an employer. This omission, while not tracked, is assumed to have increased over time, understating the labor force participation rate as a result.
A second graph tries to capture these demographic trends:
This data, compiled by the Bureau of Labor Statistics, shows a declining participation rate by 16 to 24 year-olds, and a rising rate from 55 on, albeit from a much lower base. The decline in the 16 to 24 year olds can, in part, be explained by the rise in education participation. For other groups 55 and older, the participation rate is increasing in relative terms, and enhanced by the aging of the population as younger age groups have less proportionate sway over the data than was previously the case, and older groups have more influence over the data. The increase in 65+ workers is the result of better health as well as, in some cases, a lack of retirement resources. Still, the participation rate for 65 and over is less than a fifth of the rate of those 25 to 64.
The conclusion from these two charts (plus the changing relative weighing of age groups over time) is that fewer people are participating in the work force because they have retired or otherwise withdrawn from the work force. As baby boomers continue to retire, expect this trend to continue. The trend is not a matter of economic growth or weakness as much as demographics. Those who use the data to draw other conclusions are at best disingenuous, and at worst politically motivated.
Economic activity continues apace. Strength can be seen in auto production, housing starts and more recently, capital goods expenditures.
The index of Leading Economic Indicators continues to score new highs for this recovery. It seems likely that soon we will be working against input constraints in labor. Only a more rational immigration policy can alleviate this.
Interest rates are all but set to rise in September and perhaps again in December. As the economy gets stronger, the case for keeping interest rates below the rate of inflation begins to ring hollow.
While some would argue that rising interest rates are a sign of a stock market on its last legs, in this case the rate is so far below the inflation rate that several increases would be needed to make the interest rate issue relevant to equities. Until the yield curve inverts (i.e. short-term rates are higher than long-term rates), interest rates will be of marginal relevance.
Inflation, so tame in 2015, will become more of an issue in 2016. The 50+ percent decline in oil prices has masked price increases elsewhere. Expect a higher inflation rate to be a rationale for higher interest rates next year.
The Stock Market
Stocks in the aggregate have gone up about 2.8 percent year-to-date, as gains in sectors like health care have offset losses in energy.
It would appear that leadership will undergo another change as energy prices bottom out later this year, and some of the more leveraged companies feel the effect of higher costs of borrowing. For the firms that have been buying back stock to enhance their earnings per share, a new set of tactics will be required to increase the top revenue line as well as the profit bottom line.
Warren M. Barnett, CFA July 31, 2015