Q3 2021
October 6, 2021
The 3rd quarter marked a pause in the stock markets. Although most companies are reporting strong rebounds in revenue and earnings, the markets had already anticipated this recovery. The market has moved beyond the expected good post-reopening economy and begun looking to “what’s next”? Where does the economy go from here?
Unfortunately, the scales seem to be tilting towards more reasons to be cautious.
This past quarter the market grappled with the rise in the Delta variant of COVID-19 and the risks it posed to the recovery. At first, a new round of shutdowns and restrictions appeared possible, but that concern seems to have faded. We no longer believe the pandemic poses much of a risk to the recovery.
However, COVID-related concerns remain a risk to certain industries. The rise in the Delta variant had an immediate impact on travel and leisure businesses, and similar spikes in fear could continue to plague consumer-related businesses going forward. People want to reengage, but many still are cautious and will err on the side of being safe.
The proposed stimulus bills now stalled in Congress also introduce uncertainties for the recovery. Both political parties seem to like fiscal stimulus; not surprising as spending is the lifeblood of politics. However, the markets are concerned both about the inflationary impact of the proposals, and the tax increases they include.
I believe the inflation issue is the one to be most concerned about now. With supply chains across the globe bottlenecked and prices of goods spiking, adding another layer of demand from the government seems counterproductive to reigning in inflation and stabilizing the flow of goods in the private sector.
Even the most ardent supporters of government spending see how current circumstances hardly warrant the largest spending bill in U.S. history. Regardless of your opinion on the packages, they do present issues that could adversely affect the markets.
Tax increases included in the spending bills are unlikely to have an immediate impact on the pace of the economy. However, increasing taxes to fund government spending has always dampened the long-term pace of economic growth. We would view tax increases as a negative to our outlook for the stock market.
I talked last quarter about the labor shortage being a surprise to me. As we were in the midst of the shutdowns, I was speculating that structural unemployment was the greatest risk, post-pandemic. I noted how wrong that was as labor shortages have become the issue. This had me looking back at some economic data I’ve always found interesting; data that seems to better encapsulate broader social and economic trends.
One measure of economic health we are all familiar with is the unemployment rate. It’s generally accepted that low unemployment is a measure of economic health. Years ago, when I was a graduate student studying economics, I started to understand that economic statistics often don’t measure what we think they measure. As a result, conclusions are often in error.
The unemployment rate measures the number of people unemployed and looking for a job, as a percentage of those employed plus those unemployed and looking for a job. If you are unemployed and not looking for a job, you are not counted as unemployed. The unemployment rate does not include those not looking for work.
This means a drop in the unemployment rate can either mean: (1) more people found work, or (2) more people stopped looking for work.
A more telling statistic is the Civilian Labor Force Participation Rate. This measures the number of people working or looking for work as a percentage of the entire population. Typically, the Labor Force Participation rate is measured over the population ages 16 to 65, the cohort of the population we would expect to be “engaged” (i.e., working or looking for work).
Often the lower ages are eliminated due to the expectation they are in school full time. I guess that’s reasonable. I would note, however, that the participation in work from 16- to 23-year-olds has fallen dramatically over the past 10- and 20-years. Now that I’m an older guy, I can confidently make statements like…when I was a kid, we worked! We did. Not so common any longer and getting less common.
But I digress.
When we look at the Labor Force Participation rate for 24- to 65-year-olds, and including both men and women, the last 54 years show us some interesting trends. (See the chart at the top of the next page).
Starting in 1967, the Labor Force Participation rate started a sharp upward move. More working-aged Americans were entering the workforce. The rate improved from around 59% of the working-age population working or looking for work, to just over 67% by the late 1990s.
Since the late 1990’s the rate has been in a constant decline. You can see that the Great Recession (2008/2009) accelerated the decline in those “participating” in work. Then you can see a slight uptick starting in 2016 running to the start of the pandemic. The pandemic caused a sharp decline in participation as no one was looking for work, as we were shut down. You can also see the tail of the chart shows the economic recovery we are now experiencing. Although participation has recovered, it’s still over 2% lower than it was just before the pandemic hit. That 2% is millions of workers who were previously working and now are not (or even looking).
Our current national Labor Force Participation Rate tells us that more than 1/3 of Americans in their prime working years are “inactive”. They are not working or looking for work. I don’t know about you, but I find that to be an extraordinary number.
What’s even more interesting is when you subdivide this population by gender. This next chart shows the Labor Force Participation rate of women.
The last chart helps explain the rise in the overall Participation Rate from 1967 to the late 1990s. That increase was driven by women returning to careers and working. But we can also see that the decline since the late 1990s, has not been as dramatic for women as for the overall population.
This brings us to our last chart: the Labor Force Participation Rate for Men.
What is going on here? A question many researchers have asked. Most view it as a troublesome trend as it’s been pretty well established that certain narratives are not the root cause. The main drivers of men becoming “inactive” in the prime working years is not because they are watching the kids while the wife works, or that they have just given up on finding a job. It appears the most prevalent reason is they define themselves as disabled and do not see themselves working again.
You can read all the detail in a report entitled: “The Long-Term Decline in the Prime Aged Male Labor Force Participation” June 2016, published by the Executive Office of the President of the United States.
So, when you hear on the news that the unemployment rate is falling, apparently telling you that things are getting better, keep in mind that part of the reason is that many prime working-aged men are deciding not to work any longer. In that light, it becomes easier to understand why labor shortages may prove to be a longer-lasting issue for our economy.
This bodes well for wage rates and employment opportunities (for those that want to work) but may mean bottlenecks in our production could be more long-lasting and problematic.
I believe businesses will find ways to work around the labor issue, what is more worrisome are the social implications of so many “inactive” Americans.
As I’ve noted before, from an investment standpoint one of the more interesting aspects of this post-pandemic period is those industries/businesses whose prospects have been fundamentally changed by what has occurred. We continue to be diligent in trying to understand these trends and how they impact the markets and individual investments.
I wish you a wonderful Fall and good health to you and your family.
Sincerely,
Mark Hoonsbeen, CFA
Principal
Nicollet Investment Management
800 North Washington Ave, Suite 150
Minneapolis, MN 55401
Phone: 612-915-3033
Email: markh@nicolletinvest.com