Labor Force Participation Lowest in 36 Years – Why? by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 9, 2014
IN THIS ISSUE:
1. August Unemployment Report – A Big Disappointment
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
2. Five Reasons Why the US Jobs Recovery is a Myth
3. Labor Force Participation Rate – Cyclical or Structural?
4. “Prime-Age” Men (25-54) Dropping Out of the Workforce
5. 35.4% of Americans Receive Government Welfare Benefits
6. Potomac Fund Management WEBINAR on September 18
Last Friday’s unemployment report for August was significantly weaker than expected. While the headline unemployment rate dipped back to 6.1% (same as it was for June), the number of new jobs created last month was substantially below expectations and marked the lowest number of the year.
Until last Friday’s disappointing jobs report, most economists assumed that job growth would continue at a pace of more than 200,000 new jobs per month. But today we’ll look at five facts which suggest that such an assumption was likely misplaced.
Our main topic today focuses on the labor force participation rate – the percentage of Americans working or looking for work – which is now at a 36-year low. People are leaving the workforce in record numbers, and it’s not all because Baby Boomers are retiring. Over half of those leaving the workforce have simply given up on finding a job.
The question is whether this is a “cyclical” phenomenon that will improve when the economy gets stronger, or whether it’s a “structural” problem that will be with us for years. That’s what we’ll explore as we go along today.
August Unemployment Report – A Big Disappointment
On Friday, the Bureau of Labor Statistics (BLS) reported that the official unemployment rate for August dipped to 6.1%, down from 6.2% in July. Yet the incremental drop to the same level seen in June was because more people dropped out of the labor force than found jobs.
The worst news was that the economy created only 142,000 new jobs in August, the lowest reading of this year and substantially below the pre-report consensus of 225,000. The BLS also revised new jobs numbers for June and July with a reduction of 28,000 jobs from what was previously reported.
Given that the new jobs figure was so much lower than expectations, several analysts were quick to speculate that the BLS will revise that number higher over the next couple of months. Maybe so, but there’s no guarantee of that.
The labor force participation rate – those working or actively looking for work – was down from 62.9% in July to 62.8% in August, back to a 36-year low. I will discuss the participation rate in more detail below.
About the only bright spot in the latest jobs report was workers’ pay. Average hourly earnings gained six cents in August to $24.53, bringing the year-over-year growth rate in wages to only 2.1%, which is quite weak for this point in the recovery. The average workweek was 34.5 hours for the sixth month in a row.
All in all, the latest jobs report was quite a disappointment.
Five Reasons Why the US Jobs Recovery is a Myth
Until last Friday, many economists and politicians treated the recent six-month string of 200,000+ monthly job gains as a major achievement. More likely, it was merely a slight pickup in the pace of what has been an unusually slow recovery in the US since the recession ended in June 2009.
As noted above, unemployment edged down to 6.1% from 6.2%. That’s “good” news until you realize it fell only because more Americans stopped looking for jobs. A record 92.3 million working-age adults are now out of the workforce. It has now been 62 months since the Great Recession ended, and some clear trends are emerging. Let’s look at five realities about this recovery:
• For all recoveries since World War II, cumulative job growth has averaged 12.5%. This time, job growth is just 6.2%, the worst on record. Based on this, we would need 8.19 million more jobs just to reach “average.” That’s not a strong job recovery at all.
• The labor force shrank by 64,000 in August, pushing the participation rate to 62.8%, as it was in June. The last time it was that low, Jimmy Carter was president.
• A new report says 1-in-3 workers today is a “freelancer” – a person who is self-employed but is not committed to a particular employer long-term. There are 53 million workers without a regular full-time job to go to – temps, moonlighters, etc. Yet people who identify themselves as freelancers are counted as “employed” by the BLS.
• In August, the number of hours worked – a proxy for GDP growth – and average hourly wages both rose 2.1% from last year. That does not even keep up with inflation. Not much growth there.
• New data from the Fed show that only the top 10% of American earners have seen their incomes rise under Obama. Everyone else has taken a pay cut or seen their pay stagnate.
Despite 0% interest rates, $7 trillion in added federal debt, more than $1.5 trillion in “stimulus” spending and the Fed creating more than $4.5 trillion in new money out of thin air, our economy just stumbles along. Let’s hope voters figure this out before the November elections!
Labor Force Participation Rate – Cyclical or Structural?
The job market has made a decent comeback over the past year, but the American labor force hasn’t, and the prospects don’t look good. Work seems to be on the wane in America, with worrisome consequences for economic growth.
While the unemployment rate fell to 6.1% in August – its lowest level in six years – the percentage of adult American workers who are actually in the workforce is at its lowest level in 36 years, with no rebound in sight.
The “labor force participation rate” refers to the number of working-age people who are either employed or are actively looking for work. People who are no longer actively searching for work are not included in the participation rate. During an economic recession, many workers often get discouraged and stop looking for employment, and as a result, the participation rate decreases. For the last five years, the participation rate has fallen even though we’re in a recovery.
The participation rate is an important metric to note when looking at employment data because unemployment figures reflect the number of people who are looking for jobs but are unable to secure employment. No one in government is facing up to the severity of the problem.
In her maiden keynote speech at the Jackson Hole Economic Policy Symposium in August, Fed Chair Janet Yellen posed the question of whether weak labor force participation is due to “cyclical factors” that will pass with a stronger economy, or to “structural factors” that are likely to endure, perhaps for a long time. She offered no sure answer.
While the downward trend in recent years can be attributed in part to retiring Baby Boomers, at least half the drop is because more Americans have simply given up the job hunt and left the labor force entirely. As such, the falling participation rate is increasingly due to structural factors over which the government has little control.
Following the devastating recession of 2008-09, the “jobless recovery” drove many workers out of the labor force, as often happens when the economy is in a downward cycle and then struggles to recover. But now that the expansion is starting its sixth year, the rebound in the job market is beginning to make the decline in the participation rate look more and more like it will persist long-term.
The share of the adult population, age 16 and over, that is participating in the labor force was at its lowest level since 1978, at 62.8% in August. In a comprehensive study of trends in the workforce released in December, the Bureau of Labor Statistics said it expects a further decline in labor force participation, to 61.6%, by 2022.
The BLS study provides an indispensable framework, essentially asking whether the retiring Baby Boomers will be replaced in sufficient numbers by younger workers. The agency’s conclusion is not reassuring.
Indeed, a closer look suggests that the problem is far worse than the BLS assumes. There are two key reasons. First, the study makes no mention of the surge in disability filings that has already claimed millions of dropouts from the labor force and will likely claim more. As of the end of last year, almost 11 million Americans were on disability – the highest number ever.
The BLS study also makes no mention of the Affordable Care Act’s likely negative effects on incentives to work. The Congressional Budget Office projects that Obamacare could reduce the labor force by the equivalent of more than two million full-time workers by 2016.
“Prime-age” Men (25-54) Dropping Out of the Workforce
The BLS study projected that the labor force participation rate of prime-age men, ages 25 to 54, would fall to 88.2% by 2022. Yet the participation rate of prime-age men has already fallen below the 2022 projected level, according to the most recent data – fluctuating at between 88.0% and 88.1% from May through July, a 66-year low.
Given this, when the BLS updates its 10-year projections, it will almost certainly lower its estimated figure for this all-important group. Men in this 25 to 54 age range are generally assumed to have finished school and are too young to retire, yet they are increasingly dropping out of the workforce in their prime working years. The question is, why?
It is not for lack of opportunity. Job openings in the 2Q of this year, as tracked by the BLS, have risen to a monthly average of 4.6 million, a high not seen since mid-2007. So the jobs are out there, but many applicants do not possess the skills to qualify for these jobs – the so-called “skills gap.” And then there’s the reluctance by a growing number of Americans to relocate to areas where jobs are more plentiful.
People often ask if the plunge in participation by prime-age men is due to joining the military or entering prison. No it’s not, because the BLS has anticipated that by counting active duty armed forces and the prison population separately.
The BLS estimates that the number of prime-age men eligible for civilian jobs is currently 61.2 million. Yet the participation rate among this group has fallen dramatically since the late 1940s.
The labor force participation rate for prime-age men was around 97% from the late 1940s to the mid-1960s. It has fallen every decade since, though it often regained some ground during economic expansion periods. Yet in the current recovery, the decline has continued to a 66-year low of 88%.
Currently, nearly one of every eight prime-age men is not in the labor force. Again, the question is why?
35.4% of Americans Receive Government Welfare Benefits
A new report from the Census Bureau on August 19 revealed that a record number of Americans – 109.6 million or 35.4% – lived in households that received benefits from one or more federally funded “means-tested programs” also known as “welfare” at the end of 2012 (latest data available).
What did taxpayers give to the 109,631,000 people – 35.4% of the nation – receiving welfare benefits in 2012? According to the Census Bureau:
“82,679,000 of the welfare-takers lived in households where people were on Medicaid; 51,471,000 were in households on food stamps; and 22,526,000 were in the Women, Infants and Children program.
20,355,000 were in households on Supplemental Security Income; 13,267,000 lived in public housing or got housing subsidies; 5,442,000 got Temporary Assistance to Needy Families; and 4,517,000 received other forms of federal cash assistance.”
How do you put in perspective the 109,631,000 people taking welfare? The Census Bureau says that in 2012, there were 103,087,000 full-time year-round workers in the United States (including 16,606,000 full-time year-round government workers). Thus, welfare recipients outnumbered full-time year-round workers by 6,544,000.
In the 4Q of 2008, when President Obama was elected, there were 96,197,000 people living in households taking benefits from one or more federal welfare programs. After four years, by the fourth quarter of 2012, that number had grown by 13,434,000 to 109,631,000, or 35.4% of the population.
It would be very interesting to know how high that number is today. Private estimates I’ve seen have the number near 40% today. It’s pretty sad that our own Census Bureau only has numbers through the end of 2012 – our government at work!
Potomac Fund Management WEBINAR September 18
On September 18th, we will host a live webinar with Potomac Fund Management, an Investment Advisor that has been part of our AdvisorLink® program since 1996. Potomac’s President and Portfolio Manager Manish Khatta will give you insights into three of their investment programs: “Income Plus,” “Guardian” and “Bull Bear.”
Potomac’s overall strategy is to manage for risks and avoid significant losses, with goal of delivering meaningful returns to investors. They do this by thoroughly analyzing both technical and fundamental indicators on a daily basis, and then ranking investment options based on their risk-adjusted returns.
Potomac’s three programs offer different strategies with varying risk levels: conservative growth, moderate and aggressive, so there’s a strategy to meet the needs of most investors.
Income Plus is designed for more conservative investors, and mainly invests in fixed income and market neutral funds. Its goal is to keep volatility and losses to a minimum.
Potomac’s Guardian strategy is for investors willing to take on a more moderate risk level, with the goal of increased returns. Guardian invests in sectors or asset classes with the best risk/reward ratios. It does this while also trying to keep overall volatility to a more moderate level, and thereby minimize losses.
Finally, their Bull Bear program is a 100% mechanical system that only uses three funds: a 1.5X long S&P Index fund, an unleveraged short S&P 500 Index fund and a money market fund. The goal is to deliver more impressive returns, albeit at a higher level of risk. While it is the most aggressive of the three programs, Bull Bear also uses risk management strategies to attempt to keep its risk level below that of the overall market.
The webinar starts at 2:00 pm Eastern Time and will last about 30 minutes. You’ll hear Manish explain how the three strategies work, and how Potomac manages for risk. Plus, you’ll have the opportunity to ask Manish any questions you may have.
You can reserve your spot today for the webinar by clicking here. I urge you to sign up, even if you are not sure if you can attend. We’ll have a recorded version of the webinar available on our website a few days later and if you register, we’ll be sure to send you a link to it.
Best end of summer regards,
Gary D. Halbert