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Must-know: How the Fed influences restaurant sales

Part 4
Must-know: How the Fed influences restaurant sales (Part 4 of 7)

Why the US stock market could be in a long uptrend

The employment-to-population ratio

An indicator that pessimistic critics often refer to when discussing the slow US economic recovery is the employment-to-population ratio. Unlike the unemployment rate, this ratio shows how many people are employed based on the working population, which includes discouraged workers. This includes both women and men. According to many economists, it’s the preferred indicator that shows how the labor market is doing.

United States Employment to Population Ratio 2013-09-231Enlarge Graph

The low employment ratio leaves much room for growth

Since bottoming at 58.2% in 2010, the employment-to-population ratio, which includes the population of “discouraged workers,” has barely improved at all. You can interpret this data as a negative because it means a large part of the US economy hasn’t recovered despite the stock market highs. On the flip side, however, this also means that there’s huge opportunity for businesses to unlock America’s labor force if the right training is provided and they’re allocated to growing industries. If this goal is achieved, restaurants will benefit from higher employment because people will have less time to cook at home. You may be surprised about US consumer ETFs like the Consumer Discretionary Select Sector SPDR (XLY) and Dow Jones Consumer Services ETF (IYC), as well as about McDonald’s Corp. (MCD), Yum! Brands Inc. (YUM), and Chipotle Mexican Grill Inc. (CMG).

The indicator’s downside

The downside of the indicator, of course, is that no economic cycle is exactly the same as the one before. Each recession will destroy specific types of jobs and then create new ones. You might have seen a “Did You Know?” video on YouTube that said the top-demanded jobs in 2010 never existed in 2004. If companies can’t find the right people to hire, or the majority of the labor force doesn’t have the right skill sets to match demand from booming industries (which is perhaps the reason why some hiring managers have trouble filling job openings), it may take a while (or forever) for the United States to be able to unlock its labor resource.

US Employment to Population Ratio by Gender 2013-09-23Enlarge Graph

The gain in the female employment ratio is offsetting the male employment ratio

Those who like to use averages may point out that the employment ratio could fall below 58% based on the past ~50 years of data. But it’s important to understand that the current day labor market isn’t the same as it was 50 years ago, when fewer women were looking to focus on careers and climb the corporate ladder. As the above chart shows, the female employment rate steadily climbed throughout the second half of the 1900s in the United States, offsetting some declines in male employment. Interestingly, however, female employment could have already peaked in 2000.

The Fed knows the employment ratio has barely improved

Fed officials know this. Whether they could bring employment levels back to what they were in the 2000s remains to be seen because the Fed doesn’t have a direct influence on the labor market. It isn’t the Chinese government, which could order 5,000 people to work at farms, textile firms, or steel plants. But because maximizing employment is one of its two mandates, it will try to do all it can to support economic growth by keeping interest rates low and encouraging spending as well as borrowing—as long as the inflation rate is under control. So investors shouldn’t worry that the economy will collapse and see their retirement account temporarily evaporate like it did throughout 2008.

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