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By Radu Gabudean - June 7, 2019
The rate of job creation appears to be slowing, but the unemployment rate remains at a 50-year low. Though there are questions about whether the labor market can continue to support economic growth, we think there’s enough gas in the tank for up to three more years of growth. We expect that to be true even without the unemployment rate plumbing new, and unrealistic, lows.
The Labor Department announced this morning that the economy added 75,000 jobs in May, while the unemployment rate stood at 3.6%. Analysts are conflicted about the report. While we are experiencing the lowest jobless rate in 50 years, the economy has been adding new jobs at a slightly slower pace over the last several months. We believe this is still consistent with an expanding economy.
New jobs are important because they keep the economic engine humming. For the economy to grow, it must either:
Productivity growth has been low for decades, though there are signs that it has been picking up. Average hours worked recovered within a few years after the 2008-09 financial crisis and have been little changed ever since. That leaves employment growth as the main component of economic growth.
Figure 1: Civilian Unemployment Rate in May Lowest Since 1969
Data from January 1965 to May 2019.
Source: Federal Reserve Bank of St. Louis
Except for a very brief period in 2000, the unemployment rate hasn’t been lower than 4% since 1969 (Figure 1). With most folks looking for work already hired, how long can we still see continued employment growth? That depends on how far the workforce can expand. Are there new, able-bodied people yet to enter the labor force and look for work? For that, we look at the labor force participation rate.
Much has been made of how labor force participation decreased after the 2008 recession and never fully recovered. Some of the decline has been attributed to an aging population dropping out of the workforce. If this is correct, we should expect a continuous, albeit slow, decrease in the participation rate over time. However, the opposite appears to be true—we’ve seen all recent employment gains coming from increased workforce participation.
Figure 2: Accounting for Demographic Effects in Labor Force Participation Shows Sharp Recovery Among Prime-Age Workers
Data from January 1979 to May 2019.
Source: Federal Reserve Bank of St. Louis
We separate the labor force population into two age categories:
This breakout reveals some interesting findings (Figure 2). First, the average participation rate for the 25-54 group is high by historical standards, and variations seem to be driven by economic opportunities, rather than demographics.
Second, we see several changes in the post-Financial Crisis period. Specifically, after 2008 there’s a notable decrease in the participation rate of this prime-working-age cohort, from above 83% to below 81%, bottoming in 2015. At that time, the unemployment rate among those actively looking for work dropped below 6%. The tight labor market that resulted attracted labor force dropouts back into the job market. Since then, the participation rate has recovered about three-quarters to pre-2008 levels.
Third, look at the cohort of over 55+ year-olds—their participation rate has been remarkably stable near 40% since 2008. This is true despite speculation about retirement-age people choosing to work longer.
Despite the blip in May, it’s worth keeping in mind that on average, the economy has created roughly 200,000 new jobs per month since the participation rate bottomed in 2015. If we continue at that pace, we would likely see the participation rate among the 25-54 age category return to pre-Crisis highs in about a year. Or if we look further back to the peak participation rates of the late ‘90s, a return to that level of participation could result in as many as three years of strong labor market gains. This assumes that the 55+ category will not change its participation rate over that one- to three-year horizon.
Bottomline, this economy has enough labor fuel to keep expanding for another year or three at most given the current pace of job creation. After that, the low unemployment may lead to either wage-driven inflation and economic stagnation like in the ‘70s, or an active Fed taming that inflation with higher rates and throwing the economy in recession. Of course, other forces may halt this dynamic, e.g. trade-wars, but that is a discussion for another day.
Markets may have panicked today, but we think it’s best if investors respond with poise and patience instead.
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We believe this economy has enough labor fuel to keep expanding for another year or three at most given the current pace of job creation.
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