Unavailable workers: Record growth
The below graph reflects a major shift in the U.S. labor market. As the Bureau of Labor Statistics forecasts suggest, the number of unavailable workers (the black line in the below graph) in the U.S. labor market is expected to rise dramatically from 2014 to 2022, from 57,520,200 to 62,784,000—a difference of 5,263,800. That’s exactly why the labor participation rate, as noted in the prior graph, will fall from 646% to 61.7% by 2022. This is a (statistically) very large and important number. Meanwhile, the number of “available workers” is in decline—believe it or not. The number of available workers in the USA (the yellow line) peaked at 101,989,706 in 2008—just before the economic crisis. The number of available workers as of January 2014 has now dipped to 97,939,800—that’s a 4,050,000 decline in the available workforce. Wow! Plus, it will take until December 2022 for the number of available works to return to 100,716,000. Imagine that—in eight years, there will still be 1,000,000 fewer workers than the 2008 peak levels, and a mere two million more than today. This article further considers the growth in “unavailable workers” and the implications for investors in the USA.
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For a detailed analysis of the U.S. macroeconomic environment supporting this series, please see Must-know 2014 US macro outlook: The crack in the debt ceiling.
As we discussed in the previous series on the U.S. labor markets, US labor: Is the discouraged worker bad for stocks and bonds? the media may not have portrayed the labor data in a fair and unbiased manner. There’s been much commentary suggesting that the ongoing problems in the labor market have been a result of:
As the prior articles in this series and the prior series should make clear:
Weak economic growth: It’s a demand-side problem
The weak economic growth argument that provides an explanation for the ongoing slack labor market isn’t simply a matter of incurable “structural unemployment.” Structural unemployment is a specific type of unemployment that maintains that the employment environment wouldn’t improve and remains insensitive to “demand growth” in an economy. It’s important to note the difference between “structural unemployment” and “economic stagnation.” These two issues can be considered separate. Economist Paul Krugman explains this difference via the Phillips curve—the trade-off between lowering the unemployment rate and creating inflation.
The Phillips curve and the Fed’s mandate
Note that the key mandate of the Federal Reserve Bank is to maintain full employment and to protect the value of the currency via curbing excessive inflation or deflation. Krugman mentions that “he is convinced” that the Phillips Curve flattens out at low levels of inflation. In other words, the current high level of “structural unemployment” should be much lower than it currently is, as the U.S. economy is in a low inflation environment. So you could argue that the Fed has done its job to support labor markets via low interest rates and maintaining a less-than-ideal, though positive, inflationary environment. In other words, the labor market isn’t behaving with sufficient consistency with the standard Phillips Curve model, and that economic stagnation continues to prevail. This suggest to economist Paul Krugman that there’s something else contributing to the weak economic recovery and poor labor market data. Krugman suggest that this is a demand-side problem, and that the real issue policy needs to address is the stimulation of aggregate demand in the U.S. economy.
The Baby Boomers and aggregate demand
Looking forward, the shrinking labor market should support the post-2008 slack labor markets, as shrinking supply meets a fairly weak market of labor demand. In other words, it’s possible that natural progress will mitigate a good portion of the labor market problems. However, it’s also important to pay attention to additional policy response measures specifically designed to address the lack of aggregate demand in the U.S. economy. It would appear that Krugman is skeptical of the post-Reagan supply side doctrine of cutting tax rates as an economic cure-all. Even the Laffer curve suggests that both excessively high and excessively low tax regimes lead to sub-optimal economic growth. It would appear that Paul Krugman’s recent decision to work with the City University of New York on exactly this issue, involving income equality, is a significant step in shifting the economic debate from fig leaf economic discussion of “structural unemployment” to the intricate policy measures required to strategically stimulate domestic demand in the USA.
While the shrinking of the labor force may provide some support for ongoing improvement in this regard, developing new economic policy to more specifically address the management of aggregate economic demand in the USA may be a significant economic policy overhaul that could have a very significant impact on how the economy is managed. Putting these theories into practice could bring significant change to tax policy, labor policy, and the flagging long-term investment environment in the USA. It might be the beginning of a brave new economic experiment.
A note on credit: CIT Group versus T-Mobile USA
CIT has a market capitalization of $9.57 billion (the value of all its equities) and is considered a high yield credit. Its debt is considered below the investment-grade cut-off of “BBB” rating, as it’s in the BB (junk bond or below–investment-grade) category. Reducing the firm’s $23.17 billion of debt by the $6.18 billion of cash holdings leaves approximately $17 billion of net debt, and a 1.77 debt to equity ratio. CIT Group currently has a February 19, 2019, senior unsecured bond yielding 3.46%, versus Sprint’s August 15, 2007, senior unsecured bond yielding 2.95%, Verizon’s February 15, 2008, senior unsecured bond yielding 2.00%, T-Mobile USA’s February 19, 2019, senior unsecured bond yielding 3.00%, and Caesar’s Entertainment’s June 1, 2017, senior secured bond yielding around 11.00%.
An improvement in labor and credit conditions would likely improve CIT Group’s credit rating—though with a BB- senior unsecured bond yielding 3.46% versus T-Mobile USA’s BB- company-guaranteed bond yielding 3.00%, CIT’s unsecured yield reflects a strong fundamental credit (Bloomberg & Capital IQ, December 31, 2013 Quarter).
To see how the accelerating growth in “unavailable labor” could impact fixed income markets in the USA, please see the next article.
To see how the “discouraged worker” impacts U.S. financial markets compared to the Baby Boomers generation dynamics, please see Is the discouraged worker a lagging indicator for the S&P 500?
Equity outlook: Cautious
Should the debt ceiling debate re-emerge after the mid-term elections in November, and macroeconomic data fail to rebound in sync with record corporate profits, investors may wish to consider limiting excessive exposure to the U.S. domestic economy, as reflected more completely in the iShares Russell 2000 Index (IWM). Alternatively, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index (IWD).
Plus, even the global blue chip shares in the S&P 500 (SPY) or Dow Jones (DIA) could come under pressure in a rising interest rate environment accompanied by slowing consumption, investment, and economic growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY) or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs. Until there’s greater progress on the budget and federal debt issue, and consumption, investment, and GDP start to show greater signs of self-sustained growth, investors may wish to exercise caution and consider value and defensive sectors for investment, or individual companies such as Wal-Mart Stores (WMT).
Without sustained improvement in economic growth data, there’s little doubt that the debt level issue and tax reform will be a big issue later in the year. Current economic data noted in this series suggests that the probability of the 2013 sequester issue returning—in one form or another—could be higher than many think. The data is simply not that robust—yet.
Equity outlook: Constructive
However, if investors are confident in the ability of the USA to sustain the current economic recovery as a result of the improving macroeconomic data noted in this series, they may be willing to take a longer-term view and invest in U.S. equities at their current prices. With the S&P 500 (SPY) price-to-earnings ratio standing at 19.65 versus the historical average of around 15.50, the S&P is slightly rich in price—though earnings have been solid. However, with so much wealth sitting in risk-free and short-term financial assets, it’s possible to imagine that a large reallocation of capital that is “on strike,” including corporate profits, into long-term fixed investments. This could lead to greater economic growth rates and support both higher equity and housing prices as well. In the case of a constructive outlook, investors should consider investing in growth through the iShares Russell 1000 Growth Index (IWF) or through individual growth-oriented companies such as Google (GOOG).