Why is it that even though the unemployment rate in the U.S. is at relative historic lows, it doesn’t feel as if job growth is booming? The most obvious answer is that the way unemployment is calculated can cause the unemployment number to drop, even though job growth isn’t happening. When people stop looking for jobs, they also drop out of the data pool under consideration. Also, part-time employment is under the umbrella of ’employment’, so the notion of full versus under employed gets glossed over. Putting such particularities aside, what really is at issue is how many people we have working versus the entire adult population. Are we historically under-performing?
In the graph below you will see that since ’00, and especially since ’09, we have seen a sharp decline in the labor participation rate. This is the number of people actually in the workforce. Concurrently the population of the U.S. has not decreased. According to the U.S. census in 2000 the adult population (+18) in the U.S. was over 209.1 million. In 2010 that number was over 234.5 million.
As fewer people are participating in the labor market, we see that more adults are available for work. This is not a good combination. This is particularly bad given more people are on public assistance. As the graph shows, during this period we are seeing increasing numbers on disability. Whether it is disability, food stamps or any other form of public assistance, we must have an adequate tax base to support these initiatives.
This chart conveys why the ‘recovery’ feels so weak. Not only is the recovery weak, it is limited in scope to fewer people than in previous times. When we read that more than 70% of U.S. households have less than $1,000 in savings, this further drives home this reality. Stock market highs are far from the minds of those with no savings.
As an investor, we must keep these economic facts in mind as we craft and refine our investment strategy. These facts, though negative, do not necessarily mean the market is doomed. What it means is that as the market trends higher, we should eventually see a shift in basic economic measurements, such as those presented here. If these numbers do not improve, what we are looking at is a market that is bubbling up without the necessary foundations below. In that case the investment strategy we employ must be more apprehensive and protective of downside risk.