“If borrowing and spending all this money led to more jobs than we would be at full employment already.” – Senator Paul Ryan
The December jobs report was released last Friday with some data points that surprised many economists. The unemployment rate unexpectedly dropped to 6.7% versus the consensus view of 7.0%. On the surface, this sounds like fantastic news as lower unemployment rates are typically associated with a higher percentage of employed individuals. Such was the case with December’s report as non-farm payrolls increased by 74,000. Although the vector was in the right direction (job growth versus job declines), the number of jobs added was rather paltry compared to the consensus estimate of 195,000 for December. The main reason the unemployment rate dropped was due to a decrease in the labor force participation rate.
The latest jobs report showed that 347,000 people left the workforce, which was a little more than 4x the amount of jobs that were created. As such, the decrease in the unemployment rate was more a factor of the diminishing labor force versus growth in employment. Last year, David wrote about the ever shrinking labor force in our Insight entitled Lack of Participation. In the chart below, he showed how the labor force has actually been shrinking ever since it peaked back in 2000.
Since April of last year, this rate has continued to drop from 63.3% down to 62.8% as of December. The reason for this structural decline in the labor force participation rate was laid out in our previous Insight.
We arrive, finally, at the single biggest reason for the decline in labor market participation: aging demographics. Since the BLS considers anyone over 16 years of age to be of working age, the denominator used in the participation rate calculation includes retirees. Given this fact, the higher the average age of the population, the lower we would naturally expect the participation rate to be.
So what does this all mean? First off, any single monthly employment report must be taken with a grain of salt. There are multiple known and unknown factors at play that can swing the numbers either vastly above or below the consensus expectation. After all, we are talking about measuring a number in the tens of thousands for a nation with a population north of 300 million. It typically takes several months of “bad reports” to confirm anything is structurally shifting in the economy. Be that as it may, capital markets are in the game of trying to be one step ahead of the rest, so extrapolating off of single data points is common place. The takeaway from the December jobs report is that the economy might not be recovering as robustly as the Fed had hoped.
Remember, it was just last month that the Fed announced they would begin reducing the amount of bonds they are purchasing every month from $85 billion down to only $75 billion (collectively known as “tapering”). Ben Bernanke even went on record to state that he expected the Fed’s QE program to wind down steadily through 2014 and conclude by the end of the year. This was all based on the premise that the economic recovery was gaining steam and we might once again be able to return to an era where the economy wasn’t driven by the Fed’s “extraordinary measures.” On the margin, the December jobs report might have thrown a monkey wrench in the Fed’s taper glide path.
Author Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.
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