Economic And Financial Digest Page 1

ECONOMIC AND FINANCIAL DIGEST

Volume 23Volume 23

(PUBLICATION DATE:10/22/15

November 2015

Where Did All The Workers Go?

performance has been clearly evident over the past year. Afterposting a 3.3 percent growth rate over the second half of 2014, therecovery downshifted to a meager 0.6 percent pace in the firstquarter of this year; it then rebounded to a 3.9 percent rate in thesecond quarter before the gears became clogged again in the latesummer months. At this writing, it looks like real GDP in the thirdquarter advanced at about half the second quarter’s pace.

As nerve wracking as these gyrations may be, one keymeasure of the economy’s performance has been a model ofconsistency: job growth. Nonfarm payrolls have increased by anaverage of 212 thousand a month since early 2012, with themonthly pace accelerating to 247 thousand between last Februaryand July of this year. Only once during the latter 18-month periodhas the monthly increase fallen significantly below 200 thousand.But that trend line was breached in August and September, whenthe economy generated 136 thousand and 142 thousand jobs – theweakest two-month pace in more than three years.

Not surprisingly, the slowdown raised fears that the jobmarket was cooling, reducing the prospect of stronger wage gainsthat workers have long been waiting for. But these fears may bemisplaced, as the smaller job gains are taking up as much slack inthe labor market as the larger payroll increases had before. Thereason: workers are exiting the labor market in droves and recentevidence suggest that they are more likely leaving for voluntaryreasons – such as retirements – than out of failed hopes of findinga job. In September, the labor force shrank by 350 thousandworkers, lowering the share of the adult population either holdinga job or looking for one to 62.4 percent, the lowest labor forceparticipation rate since the late 1970s.

Don’t cry for the economy just yet. Yes, growth slowed andthe jobs engine downshifted in the third quarter. The setback hasset off alarms in the financial markets, where volatility has alreadyspiked in response to global turbulence. It’s unclear how much ofa negative impact the weakness overseas is having on the U.S.economy. But the Federal Reserve is keeping its finger off theinterest rate trigger until it has more information. As much asanything, the Fed’s wait-and-see attitude, which is keeping interestrates at rock-bottom levels, is a calming influence on the markets.

The question on the minds of policy makers as well asinvestors is whether the economy is going through another one ofits temporary soft patches or if something more fundamental isunfolding. This is not the first time the economy hit a speed bumpand employment sagged since the Great Recession ended more thansix years ago. Previous episodes, however, were usually caused bysome unexpected external shock — the weather, politics, a foreign-related upheaval – whose impacts were abrupt but brief. No suchoutside force seems to be at play this time. Instead, the most visiblecatalysts – global weakness and the export-sapping strength of thedollar– have been festering for some time. They are neither unex-pected nor quickly fading.

With these persistent drags firmly ensconced, it is hard to seethe economy staging a vigorous rebound in coming months. Theoptimal outcome is a return to moderate growth and steady job gains,much like the pattern seen throughout the recovery. To some, thisconstitutes an extension of the ho-hum performance that made thecurrent upturn the weakest in the post World War 11 era. But thatcriticism is losing its sting as the recovery, now more than six yearsold, gets ever longer in the tooth. With the economy moving closerto its capacity limits, it would be unrealistic to expect the labor marketto generate 200 thousand jobs a month or output to expand by muchmore than a 2-2 ½ percent pace on a consistent basis. While there’sstill room for improvement, a steady diet that exceeds those yard-sticks would sow the seeds of the next recession. The challenge forpolicy makers is to provide just enough stimulus to counter theglobal headwinds and keep the economy on a steady course. That,in turn, would require a lot of statesmanship, as there is a wide rangeof opinions as to how this should be accomplished.

Labor Market Losing Members

The wild gyrations in the economy’s growth rate have becomea familiar pattern since the end of the recession. Unlike past upturns,the current one never seemed to gain consistent momentum, grow-ing at an above-trend pace for more than two quarters. That erratic

Shrinking Labor Force

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70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15

P ercent o f Civilan P o pula tio n 16-years

and Older in Labo r Fo rce

Percent

Economic And Financial Digest Page 2

A Shallower Shadow Pool

To be sure, the shrinkage is nothing new, as the labor force asa percentage of the population has been falling since the late 1990s.But the decline accelerated during the recovery, which contributedimportantly to the drop in the unemployment rate, from a cycle peakof 10 percent to the current 5.1 percent. That’s because people whoare not in the labor force are not counted as unemployed, even thosewho would take a job if one were available. Many economists,including some Federal Reserve officials, believe this “shadow” poolof unemployed workers would re-enter the workplace if job pros-pects were better. As a result, they represent potential competitionfor jobs and are considered a key factor holding back wage increases.

But that argument had much more credibility earlier in therecovery, when the pernicious legacy of the Great Recession wasvery much in evidence. During that severe downturn and the haltingrecovery that followed, a major fraction of the 8.7 million workers thatwere laid off in 2008 and 2009 remained unemployed for a long time.As the job search became ever more futile in 2010 and 2011, theselong-term unemployed workers became too discouraged of everfinding a job and eventually dropped out of the labor force. Othersleft to return to school, to attend family obligations or simply to takeearly retirement. It is this pool of drop-outs that comprise the mostlikely source of re-entrants to the labor force.

But since 2011, the ranks of the long-term unemployed havethinned dramatically, as many have either stopped looking or foundjobs in a reviving labor market. The steady improvement in the jobmarket, in turn, has reversed the trend of discouraged workersdropping out of the labor force. By September, the number of peopleout of work for more than six months had shrunk by two thirds fromits post-recession peak, and discouraged workers have shrunk byhalf. Yet the labor force has continued to languish, with more peopleexiting than entering the workplace. While the exodus is slowing, itis still larger than it was prior to the recession. What gives?

Retirement Boom

Clearly, if the workers dropping out of the labor force could bereadily lured back by better job prospects, the case could be madethat there is still a good deal of slack in the job market. Hence, to soakup that slack and improve the wage prospects for workers, theeconomy would still need to generate jobs at the hefty 200 thousandmonthly pace seen in recent years. With wage growth remainingstagnant through September, it is no surprise that some policymakers firmly believe that this is still the case.

But a closer look at just who is leaving the labor force suggestotherwise. Each month, the Labor Department takes a survey ofpeople not in the labor force to determine how and why they got there.One of the more striking trends since the spring is the declining shareof non-participants that dropped out for involuntary reasons, suchas discouraging job prospects, family responsibilities, ill-health ordisability. Conversely, the share of people not in the labor forcevoluntarily, i.e., because they do not want a job, has picked up.

The survey does not answer the question as to why more andmore individuals prefer not to have a job, but the reason should bepretty obvious. Simply put, the population is aging, and waves ofbaby boomers are moving into their retirement years. On average thisyear, 56 percent of the adult population not in the labor force is at least55 years old. As would be expected, this share has been trendinggently upward for some time, but the pace has accelerated over the

past two years. To be sure, some of the increase earlier in therecovery was no doubt an artifact of workers taking prematureretirement after being laid off and facing poor prospects of findinganother job. But that would not seem to be the case now. Onereason: there’s been a huge leap this year in workers jumpingstraight from employment to out of the labor force, a compellingsign that the exodus reflects a bulge in voluntary retirements.

The New Normal

Not only is the labor force experiencing an increased paceof dropouts, it is also receiving fewer entrants, thanks in good partto slower growth in the working age population. As a result, thelabor force is poised to remain on the slower growth path for yearsto come unless an unexpected bulge in immigration alters thecourse. The Congressional Budget Office is predicting an in-crease of 0.7 percent a year through 2020, about half the annualgrowth rate in the thirty years prior to the recession. While therewill probably be some increase in the labor force participation rateas the economy moves closer to full employment, it is not likelyto be very sharp, given the ongoing rapid pace of retirements.

Needless to say, with the labor force slowing and an ever-smaller fraction of people outside of the workforce willing to takea job, it takes fewer new jobs to soak up the slack. According tothe Federal Reserve Bank of Atlanta, the economy needs togenerate only 112 thousand jobs a month to keep the unemploy-ment rate at 5.1 percent. If the 200 thousand monthly pace of thepast year were sustained, the unemployment rate would be drivendown well below the 4.9 to 5.2 percent range that the FederalReserve considers to be consistent with full employment. Hence,the tapering off in job growth in August and September is neitheralarming nor unexpected. Nor from a policy viewpoint, would itdeter the Federal Reserve from raising interest rates.

The good news is that slower labor force growth means thatcompanies will be competing for a smaller pool of availableworkers, pointing to stronger wage growth sooner rather thanlater. The bad news is that the labor force is one of the two keycomponents that drive the economy’s growth rate. The other isproductivity. If productivity growth doesn’t pick up, the economyis destined to stay on the slower growth path of the past severalyears, giving more credibility to the notion that the U.S. is miredin secular stagnation. Only then would it be time to cry for theeconomy.

Saying Goodbye to Working

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Tho usands

Wo rkers Go ing Direc tly F ro m Emplo yment

To No t In Labo r Fo rce (Mo nthly Averages )

KEY ECONOMIC AND FINANCIAL INDICATORS

Economic And Financial Digest Page 3

FINANCIAL INDICATORS*

12-Month Range

September August July June May April March High Low

Prime Rate 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25

3-Month Treasury Bill Rate 0.02 0.07 0.03 0.02 0.02 0.02 0.03 0.07 0.02

5-Year Treasury Note Rate 1.49 1.54 1.63 1.68 1.54 1.35 1.52 1.68 1.35

10-Year Treasury Note Rate 2.17 2.17 2.32 2.36 2.20 1.94 2.04 2.36 1.88

30-Year Treasury Bond Rate 2.95 2.86 3.07 3.11 2.96 2.59 2.63 3.11 2.46

Tax-Exempt Bond Yield 3.78 3.74 3.79 3.82 3.76 3.51 3.59 3.96 3.40

Corporate Bond Yield (AAA) 4.07 4.04 4.15 4.19 3.98 3.52 3.64 4.19 3.46

Conventional 30-Year Mortgage Rate 3.89 3.91 4.05 3.98 3.84 3.67 3.77 4.05 3.67

Dow Jones Industrial average 16340 17062 17795 17927 18125 17971 17932 18125 16340

S&P 500 Index 1944 2040 2094 2099 2112 2095 2080 2112 1937

Dividend Yield (S&P) 2.29 2.22 2.07 2.09 2.04 2.05 2.04 2.29 1.96

P/E Ratio (S&P) 17.0 17.4 18.6 18.2 18.6 18.4 18.2 18.6 17.0

Dollar Exchange Rate (vs. Major Currencies) 91.7 91.9 91.6 89.7 89.2 90.9 91.7 91.9 79.8

* Monthly Averages

ECONOMIC INDICATORS

12-Month Range

September August July June May April March High Low

Housing Starts (In Thousands) 1206 1132 1152 1211 1072 1190 954 1211 900

New Home Sales (Thousands of Units) 552 522 466 513 508 485 552 448

New Home Prices (Thousands of Dollars) 293 291 275 287 293 293 303 262

Retail Sales (% Change Year Ago) 2.4 1.9 2.5 1.9 2.2 1.5 2.0 4.7 1.5

Industrial Production (% Change Year Ago) 0.4 1.1 1.3 0.9 1.3 2.1 2.5 4.7 0.4

Operating Rate (% of Capacity) 77.5 77.8 78.0 77.5 77.6 78.0 78.3 79.0 77.5

Inventory Sales Ratio (Months) 1.37 1.36 1.36 1.36 1.36 1.36 1.37 1.30

Real Gross Domestic Product (Annual % Change) 3.9 0.6 4.3 -0.2

Unemployment Rate (Percent) 5.1 5.1 5.3 5.3 5.5 5.4 5.5 5.8 5.1

Payroll Employment (Change in Thousands) 142 136 223 245 260 187 119 423 119

Hourly Earnings (% Change Year Ago) 2.2 2.2 2.2 2.0 2.3 2.3 2.1 2.3 1.8

Personal Income (% Change Year Ago) 4.2 4.3 4.1 4.2 4.4 4.0 5.2 4.0

Savings Rate (Percent of Disposable Income) 4.6 4.7 4.5 4.5 4.9 4.9 5.4 4.5

Consumer Credit (Change in Mil. Of Dollars) 16018 18944.0 27231 19513 24608 20622 27231 10774

Consumer Prices (% Change Year Ago) 0.0 0.2 0.2 0.1 0.0 -0.2 -0.1 1.7 -0.2

CPI Less Food & Energy (% Change Year Ago) 1.9 1.8 1.8 1.8 1.8 1.7 1.8 1.9 1.6

Wholesale Prices (% Change Year Ago) -1.1 -0.8 -0.8 -0.7 -1.1 -1.1 -0.9 1.5 -1.1

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