REITs must-read: The “yes but” answer to the unemployment rate



The unemployment rate is ticking down, but the key question is why?

The unemployment rate is the most important data point out there right now, and it has been falling. So why doesn’t the economy feel better to the average citizen?

The reason why is the labor force participation rate. Remember, from the official definition of “unemployment,” to be considered “unemployed,” you have to make efforts to get a job. If you haven’t done anything in the prior month, you are no longer considered “unemployed”—you have dropped out of the labor force as far as the government is concerned. Of course, you are still unemployed, but for the purposes of the official unemployment rate, you aren’t.

Labor Force Particiption Rate

The labor force participation rate

The labor force participation rate is the ratio of the labor force against the demographic cohort. In other words, it’s similar to the employment-to-population ratio the Fed uses but it takes into account demographics.

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As you can see from the chart above, the labor force participation rate increased steadily from the early 1960s through the early 2000s as women entered the labor force. Since the Great Recession, however, the labor force participation rate has declined. It’s back to levels we haven’t seen since the late 1970s.

Part of the decline is due to the Baby Boomers exiting the labor force. Their children (the Millennial Generation) should be taking their place. However, the job market has been particularly unforgiving for both generations. The young have had a very difficult time finding non-menial jobs and the aging Baby Boom generation is finding themselves pushed into early retirement, as the cost of providing them health insurance is daunting for employers.

During August, the labor force participation rate fell from 62.9% to 62.8%.

Implications for mortgage REITs

The open question for the REITs (and the Fed) is whether these discouraged workers—particularly at the older end of the spectrum—are ever coming back into the labor force.

On one hand, shrinking the size of the available labor pool will put upward pressure on wages, at the margin. However, the offset is that unemployed or early-retired Baby Boomers won’t be spending much. How this shakes out for inflation remains to be seen. If we see inflation making its way back, it will be negative for mortgage REITs like Annaly Capital (NLY), American Capital Agency (AGNC), Capstead (CMO), MFA Financial (MFA), and Two Harbors (TWO).


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