Market Perspective 08/07/2020

In a twist on the Clint Eastwood movie, jobs data in the U.S. has been a story of The Good, The Bad, and the…Older (not ugly). This week we saw improved jobs data compared to the prior monthly report, however, the longer-term theme of declining labor participation rate remains.

The good. The anticipated July employment report was released Friday and showed better than excepted data. Payrolls increased by 1.76 million workers with the leisure, hospitality, and retail sectors gaining the most. The related unemployment rate declined to 10.2% from 11.1% (source: U.S. Bureau of Labor Statistics). This improvement is directionally good news for the economy on this more frequent month-over-month data.

The bad, or perhaps better stated, the weaker is the labor participation rate, which is a measurement of the economy’s active workforce. More specifically, it’s a measure of people working or seeking work as a percent of the working-age population. The rate currently sits at 61.4%. Pre-COVID, the participation rate was in the 63% range, which has been in decline since the late 1990s (source: Federal Reserve Bank of St. Louis). This declining longer-term theme has been a weak spot in overall jobs data, and changing it can be a slow process.

Why is the labor participation rate in decline? We are getting old (not ugly). The Baby Boomer generation is exiting the workforce faster than younger workers are entering the workforce. This shift is just one demographic trend putting downward pressure on labor participation. There are also social and economic trends that have an impact on the workforce. This decline in labor participation is a longer-term trend with some silver linings. Baby boomers exiting creates opportunities for younger generations to advance or enter the workforce. The opportunities and advancements can lead to higher standards of living; consumption and housing spending can increase. These factors, although slow to change, can be good for a growing economy.

Market Comments

• Stock markets broadly are higher on the week as we approach the end of this earnings season in the U.S.

  • As of Friday mid-day, 89% of companies in the S&P 500 have reported earnings with a consistent theme of better than expected results

• The U.S. Federal Reserve (Fed) met a week ago and in a unanimous decision agreed to keep short-term interests rates unchanged at a range of 0-0.25%

  • Lowering short term interest rates is one method used to spur economic activity; this playbook has been similar to the Fed actions taken during the 2008-09 financial crisis

• U.S. household debt declined during the second quarter for the first time since 2014; likely due to reduced spending during the COVID-19 economic shutdown period (source: New York Federal Reserve)

  • Credit card balances showed the largest drop as consumers paid down balances

• Mortgage applications have been trending higher over the past few months, spurred by record lows in interest rates

• The U.S. State Department lifted its Level 4 Global Health Advisory, returning to a country-by-country guidance

  • Too soon to determine how these reduced restrictions will change mobility data

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