Australia | May 20 2013
– Shrinking US labour force
– Demographic shift
– Unemployment rate misleading
– Inflation becomes a threat
By Andrew Nelson
The first few months of the year saw investors just about the world over pulling out the corks and cheering the very positive start to 2013. It all began towards the latter end of 2012, when an increasing number of analysts started to extrapolate a fledgling US recovery into a global economic resurgence in 2013.
While investment markets continue on with an impressive advance, the US economy hasn’t. Add to that a slowdown in China and a Europe nowhere nearer to fixing its economic downturn. All of a sudden an increasing number of market participants are beginning to wonder just one thing: is the party over?
If we start with the premise that a US economic recovery is needed to drive the global recovery and follow that with a second premise, employment growth must drive a US recovery, then the answer is only maybe and here’s why:
Analysts at CIBC World Markets point out that the US jobless rate finished last year at 7.8%. This was a significant improvement on the 8.1% the market had been expecting. However, there was a fundamental problem with this decrease that wasn’t sufficiently factored in; the rate improved, at least in part, due to a significant exodus of workers from the labour force.
Baby boomers are retiring in increasing numbers and this is providing artificial support for employment statistics.
65% of the US population was working or looking for work when the jobless rate peaked in October 2009. Now we’re at 63.3%. Thus, there is a smaller pool of labourers, putting downward pressure on the jobless rate.
Around 1.8m individuals left the US labour pool in 2012. On a closer look, CIBC has noticed a significant shift in demographics. The bank points out that around two thirds of the exits were older workers. The problem is that these older workers comprise less than 20% of the total population. It’s unlikely we’ll see these folks back looking for work if and when employment activity picks back up.
What’s more, the US workforce continues to age and the prime 25-54 year old segment of the workforce is shrinking. With more comprehensive measure of US employment still showing around a 9% rate, there is still plenty of slack in the labour market, says CIBC. Ultimately, the bank suspects these trends will keep the participation rate from ever showing any recovery, let alone allowing the rate to climb back to pre-recession levels.
With demographics, instead of cyclical economics, now the major influence on the US labour market, CIBC sees this dampening longer-term US growth. The main reason is that with slower trend growth, it won’t take much in the way of new jobs to spark possibly dangerous levels of inflation once the economy picks up and the hiring begins again.
CIBC points out that even were participation rate inside the 25-54 age group able to recover to pre-recession levels, the overall participation rate would keep falling given the demographic shift. Even were the rates to pick up right away. More likely, though, we’ll still need to see strong and sustained growth, which we probably won’t until 2014.
Thus, participation rates will continue to fall and the jobless rate will reach the Fed’s 6.5% unemployment target by February 2015. This is well ahead of the mid-point of consensus. But CIBC doesn’t stop there. The bank is forecasting stronger economic growth and hiring than most over the next year and on these numbers, the unemployment rate should hit the 6.5% in October 2014.
While it all sounds great, this would provide a double edged sword. A lower jobless rate could quickly push wages higher and just as quickly stoke fears that inflation will quickly accelerate. That would likely encourage what has been a forward-looking Fed to start nudging rates higher by the end of 2014, at least six months before the mid-2015 date that most of the market expects.
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