13 Feb

Why Job Creation And GDP Growth Go Hand-In-Hand

WRITTEN BY Russ Koesterich, CFA

Over the long term, a country’s economic growth is determined by the rate of increase in the labor force and productivity growth. If fewer people are working, unless there is a surge in new workers or everyone suddenly become more productive, growth slows. This is exactly what has happened over the past dozen or so years in the United States. And to the extent that an aging population continues to retire, lower labor force participation may be an even bigger drag on growth in the future.

Why Job Creation And GDP Growth Go Hand-In-Hand

Market Realist – Job creation and GDP growth go hand-in-hand.

The graph above compares the annual gross domestic product, or GDP, growth rate with the yearly change in jobs created over the last 50 years. As you can see, the job markets and the economy tend to move in a similar pattern. The correlation between the two is as high as 0.82. No wonder job reports move equity markets (SPY)(IVV) the way they do!

However, keep in mind that an increase in jobs doesn’t necessarily mean an increase in the labor force participation rate. The latter also takes the population into account. We’ll discuss this more in the next part of this series.

Since fewer workers are working, it has a negative impact on discretionary income. In turn, discretionary income affects consumption. It’s important to remember that consumption makes up 70% of the US GDP. The economy depends on consumption. That’s why a lower participation rate is a drag on the economy. However, lower oil (USO) prices offset that to an extent. It’s positive for consumer sectors like consumer staples (XLP) and consumer discretionary (XLY).

Latest articles

Ford plans to produce autonomous cars for ridesharing by 2021. GM acquired Cruise, a self-driving startup, to kickstart its autonomous driving plans.

PayPal stock (PYPL) is trading down today. With earnings due after the market closes, you should buy PayPal stock on the current dip.

This year has been rough for cannabis companies, including Aurora Cannabis (ACB), whose stock is already down 27.82% year-to-date.

The road for Netflix is getting rockier by the day. As it prepares for the imminent streaming wars, it's been caught off guard by a new development.

A Senate bill introduced this week could force Facebook (FB) to support the growth of rivals such as Snapchat. Let's take a closer look.

Over the past five trading sessions, Microsoft stock has closed in the red—making it very attractive for investors before today's earnings announcement.