Understanding jobless recovery

The US is about to complete five years of the so called recovery since the Great recession that ended in the second quarter of the year 2009 as acclaimed by the Nation Bureau of Economic Research (NBER). Broadly speaking, it hardly feels like a recovery. Even so, there has been a barrage of voices from amongst economists, analysts, who have been claiming no short of a victory. Many have been highly optimistic expecting growth in the trajectory of upwards of 3% and increasingly inching towards the 4% levels suggesting that the US economy is now firmly out of the woods.

The forward guidance from the Fed helps in keeping markets expectations under check. However, the broad policy decisions going forward would really depend on the health of the economy. The very reason of being pessimistic of the probability of winding down comes from the state of the economy where recovery is not really sustainable yet.

It is a known fact that US is a consumption driven economy. If consumption were to look better then you really need money in the hands of the people to go out and spend. People will get money through incomes from employment or borrowing. Both the indicators are far from showing any promising signs.

In this first part of the article, we cover the employment scenario in detail which according to us is the most important aspect to ascertain the health of any economy.

The reduction in unemployment rate from 10% to 6.7% is touted as an indication of recovery. The US has been adding new jobs, but a large share of the decline in the unemployment rate can be explained by discouraged workers leaving the labour force. This effect can be seen in the falling participation rate. Many argue that this decline in the participation rate is structural and is caused by retirees leaving the labour force. This argument seems misleading at best.

US Employment and Participation Rate (%)

Source: Bloomberg

The labour force participation rate is of late showing some signs of stabilization. However, a lot more progress would be needed before we recognize it as any real improvement on the unemployment scenario. As far as the trend goes, the participation rate has fallen by close to 3% from about 66% to 63%. Of this decrease, 1.3% and 4.7% were driven by the 16-24 and 25-54 age groups, respectively. The rest was offset by a 3.1% increase in participation by the ageing population i.e. 55+ age group. This is reflective of a deep problem, as it suggests that retires are failing to make ends meet and have to work for longer or even come out of retirement, and that the future workforce, those in their prime working years, are leaving the labour force.

A careful look at the data tells us that without the 3% contribution from the ones staring at their retirements i.e. the 55+ age group, the labour force would have fallen below 60% for the first time since 1971, a period when the participation rate was starting to expand, driven mainly by women entering the workforce.

This "un-recovery" phenomenon can also be explained by the employment to total population ratio which also suggests that it`s been a jobless recovery if at all. The employment to population ration has fallen from about 63% to close to 58%. This level was last seen not before the early 1980`s.

US Employment to Total Population Ratio

Source: Bloomberg

That`s not all; the trend is likely to continue. During the 2012-2022 period, BLS expects the growth of the labour force is anticipated to be due entirely to population growth, as the overall labour force participation rate is expected to decrease from 63.7% in the year 2012 to 61.6% in the year 2022.

US Labour force Participation Rate

The unemployment scenario doesn`t show much signs of improving. Such a weak core labour force growth suggests that US potential GDP growth has declined considerably over time. The dependency ratio will increase over time as the participation rate increases which means that all those employed will be strained further to feed the growing class of dependents. All the optimists that are sticking their necks out for higher GDP growth need to turn their attention from wallstreet notional profits to main street realities that are incapacitated to deliver higher growth levels unless the structural problems are sorted out.

In the next round of article, we would see if there is a story surrounding the borrowing aspect that can underpin the recovery. If not, then what has all the QE also known as money printing over the last few years really accomplished?