Add Macquarie to the growing choirs of financial analysts to decry the lack of US workers. At a time when Minneapolis Fed President Neel Kashkari bluntly told US business if they want workers, perhaps it’s time to raise wages, the question is: when will a diminished labor pool begin to impact economic performance? Macquarie analysts David Doyle and Neil Shankar think they have the answer, pointing to slowing GDP growth starting in 2018.


Diminished Labor Pool
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Population to employment ratio reaching high as wage growth remains generally muted

A recent New York Times article pointed out what has been widely documented: the middle class in the US is shrinking when considering wage and income growth. This divergence has been particularly acute most recently, with middle and working class families not keeping pace with wage growth. This statistical phenomenon is also credited with giving rise to the election of Donald Trump.

But now something is changing. The labor pool is tightening. Labor market slack is not an ethereal “feeling” that business leaders get when they can’t fill vacant jobs. It is documented through a number of measures, including the employment to population ratio. That measure of a healthy economy is approaching high levels not seen since the 2008 global financial crisis.

Citing Bureau of Labor Statistics data, Doyle and Shankar point to the ratio of those age 25 to 54 who are employed relative to the general population and notes that it is exceeding 78, nearing “full employment” based on one measure.

That diminished labor pool ratio was up near 82 just prior to the 2001 tech meltdown and then dropped precipitously from near 80 just before the financial crisis to bottom below 75 from 2010 to 2012 before moving steadily higher to its current level, just 1.5 away from what was considered full employment in 2007.

While supply and demand metrics would typically point to a tight labor market resulting in increased wages, that isn’t happening.

As baby boomers retire, US economy needs to create fewer jobs to maintain employment levels

The diminished labor pool has many tenants, including the ability to lure people back into the work force but more specific to the current environment the ability of population growth to keep pace with those leaving the workforce due to retirement.

As those in government statistics move from employed to “not in the labor force,” the question of luring them back into the job market is one method to deal with labor force slack.

This is where Fed President Kashkari comes in, where he reportedly said to business leaders in Sioux Falls, SD “If you’re not raising wages, then it just sounds like whining.” While the new jobs being created often require educational attainment or special skills, there is even a growing shortage of unskilled workers, as evidenced in agricultural harvests. The lack of migrant farm workers due to recent is being blamed for crop losses, but wages for these workers remain relatively the same.

Macquarie: A diminished labor pool could have consequences starting in 2018

The lack of a large pool of available labor could have wide ranging consequences, particularly as a large segment of the population begins to retire. As one of the largest demographic groups alive today, baby boomers are retiring and the differential is impacting labor force slack.

Doyle and Shankar estimate that the economy only requires 45,000 new jobs each month to hold the labor rate stable due to the high number of boomers retiring. Juxtapose this with US trend growth in jobs, which is near 180,000 per month, and you have a recipe that could “place the economy on a collision course with potential output in the next 6-12 months.”

In past cycles, this has not been at issue because the nation’s growing demographics required increased job growth. At present, this could lead to a sharp slowing in jobs as well as real GDP growth.

When will the rubber meet the road?

In a breaking with consensus forecasts that see growth ahead, Macquarie thinks 2018 will see a decided slowing in GDP as labor shortages and muted productivity growth appear to spoil the economy and stock market, both of which seem to have been on cruise control.

Doyle and Shankar estimate 2018 GDP to drop from near 2.5% to 1.6% in 2018 – a trend that will get worse by 2020 when GDP growth is estimated at 1.4%. This should keep the US 10-year Treasury yield close to 2.3% and might warrant a defensive and yield-oriented portfolio allocation, they said.

Of course, to solve the diminished labor pool issue, America could always try the “successful” German model. Meaning, GDP is not the end all for everyone.