The Bureau of Labor Statistics and the Federal Reserve Bank of St. Louis put out great data and great charts. Maybe the St. Louis Fed buys Google Click Ads so that their charts pop up first when you Google a subject, but their charts are great.
The latest chart follows the release of the May Jobs Report on June 1, 2018. The headline was that the US economy added 218,000 non-farm jobs in May, which caused the Unemployment Rate to fall to 3.8%. It was the 92nd consecutive monthly increase in non-farm payrolls and the lowest Unemployment Rate since prior to 1989.
The growth in jobs is great news, but what I want to address here is the Labor Force Participation Rate, which is the number of employed plus unemployed but looking divided by the total population over Age 16. Here is a link to the chart by the St. Louis Fed:
The chart shows that the LFPR has been stalled at between 62.3% and 63% for the past 4 years. That’s a very tight range for 4 years.
Economists and market watchers are looking at the LFPR to see what happens next (isn’t that always the case?). The issue is: If the LFPR remains constant and the Unemployment Rate also remains constant or continues to fall, does that mean wages will rise? And if wages rise, does that mean inflation will go up? And if inflation goes up, will interest rates also go up? Gaze into the crystal ball.
There is evidence that wages are rising. This website shows that hourly earnings (on a macro level) have increased for 7 months in a row and 11 of the last 12. However, the annual increase is 2.7%, which is still pretty tame. One line of thinking is that the increase in wages will incent more of those who are not currently participating to actually participate. We will see how that plays out, but I’m skeptical.
I believe large demographic trends explain a lot of economic phenomena and that the aging workforce populace explains a lot of the decline in the LFPR from the 67%-range during the 1990’s to the current under-63% range. The Baby Boom Generation is retiring en masse, a lot of them early. Our overall population is aging – not as much as Japan’s, but it is very significant. Younger people tend to work more than older people.
I look at the LFPR chart a little differently. Perhaps the period from about 1978, when the LFPR broke above 63%, until 2014, when it broke back below 63%, was the anomaly. Perhaps the 63% level is equilibrium – as it has been for the past 4 years. If you go back many years, the LFPR flirted with 60% in 1956 but didn’t actually rise above 60% and stay there until 1969. Then it rose throughout the remainder of the 20th Century until reversing and falling during the 21st. I don’t believe the slightly higher wages in our current economy will incent to non-participators out of their couches. It would take drastically higher wages to do so, something that isn’t happening in our current global economy.
My take on all of this is that you should Buy Stocks. I don’t see inflation picking up because labor costs are globalized. I don’t see the LFPR increasing because US wages are not increasing fast enough and because the population continues to age. The unemployment rate may go down more but I don’t think it will ultimately result in significantly higher inflation. Cast your fishing line into the water; get off the pot; use any metaphor you want, but you should be long stocks in this environment – not your entire investment portfolio, but enough so that you are comfortable with the risks therein.