Why the US labor market recovery is weaker than it looks


Dec. 4 2020, Updated 10:53 a.m. ET

Retired or discouraged?

The below graph reflects the dramatic “improvement” in the decline of unemployment in the U.S. labor market. As we noted in parts 3 and 4 of this series, the “improvement” in the U.S. labor data can be quite misleading, as the Baby Boomers have begun to leave the labor market in large number. Since 2008, there has been a growth of nearly 4,000,000 unavailable workers, and as we suggested earlier, it’s possible that as many as 3 million of these workers may have been due to planned retirement, though perhaps as many as a million or more workers opted for early retirement as a result of the economic environment. That is the big question—it’s not clear to what extent the decline in the unemployment rate is due to voluntary versus less than voluntary retirement. This article takes a closer look at the unemployment rate in the U.S. and considers the implications for equity investors.

To gain a broader understanding of the other macroeconomic factors supporting the economic and investment-related views in this series, please see Must-know 2014 US macro outlook: The crack in the debt ceiling.

Unemployed or retired?

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It would appear that the number of “unemployed” people has declined dramatically since 2008, as many of these people now consider themselves retired rather than simply unemployed. Though the official unemployment rate (U-3—the red line) has fallen from 10.0% to 6.7%—or a 3.3% decline—the labor participation rate has also declined from 66.2% to 63.0% since 2008—a 3.2% decline. Note that the decline in the labor force participation rate doesn’t contribute to unemployment. Yes, 4.0% of the labor market has left the workforce since 2008—roughly 4,000,000 workers. What remains unclear is how many of these 4,000,000 workers are really voluntarily and willfully retired. As we noted in parts 3 and 4 of this series, the trend line in Baby Boomer retirement might be around 1.0% higher than a straight line imputation would suggest. As a result, it’s possible that 33% or more of the improvement in the unemployment rate might be due to a somewhat forced early retirement.


A rough estimate might suggest that the real official unemployment rate is 1.0% to 1.25% higher than advertised—closer to 8.0% than the official rate of 6.7%. However, this is due to the sudden exodus of 4 million workers from the 97.939 million-strong workforce, and there doesn’t appear to be sufficiently clear data to accurately characterize who really retired and who really gave up looking for incremental work. Regardless, it should be noted that, given the above data, the majority of the improvement in the official unemployment rate—perhaps around 66%—is due to an improving economy. For equity investors, this means they shouldn’t panic over reports that the large majority of the decline in the unemployment rate is due to discouraged workers—both young and old. The data might suggest that such reports are exaggerated and statistically unlikely, given the expected retirement of the Baby Boomer generation anyway.

To see how these demographic changes may affect broad equity market indices, please see the next article in this series.

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?

A credit comment: Verizon BBB+ high-quality investment-grade credit

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Verizon has a market capitalization of $198.36 billion and a credit rating of BBB+. Reducing the firm’s $96.61 billion of debt by the firm’s very large $54.13 billion cash position, we’re left with approximately $42 billion of net debt and a 0.98 debt-to-equity ratio. In contrast to Sprint, Verizon has a positive net profit margin of 9.54%, and a 26.03% return on equity. Verizon’s revenues are $120.55 billion (roughly three times larger than Sprint), and Verizon also has a whopping $48.57 in EBITDA (six times larger than Sprint) to service its net debt of $42 billion—only 1.68 times larger than Sprint.

Clearly, Verizon’s very large EBITDA earnings relative to its modest debt levels would suggest that even in the case of economic weakness—related to labor and consumption or most anything else—Verizon has a far superior ability to service its debt. Perhaps a strengthening labor market and overall economy can support Verizon’s operating margins and debt service capabilities relative to Sprint in the future.

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Sprint currently has a August 15, 2007, senior unsecured bond yielding 2.95%, versus Verizon’s February 15, 2008, senior unsecured bond yielding 2.00%, T-Mobile US’ February 9, 2019, senior unsecured bond yielding 3.00%, CIT Group’s February 19, 2019, senior unsecured bond yielding 3.46%, and Caesar’s Entertainment’s June 1, 2017, senior secured bond yielding around 11.00%. (Bloomberg & Capital IQ, December 31, 2013 Quarter)

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).

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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).


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