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Is the US reaching full employment?

Phil Carden
Thursday, July 07, 2016

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By Phil Carden

Recent data confirms that the US is performing well, moving strongly towards full employment. There is solid consumer demand, coupled with what appears to be an overtly dovish monetary policy, which has been structured in consideration of international dynamics rather than local economic conditions. 

The Change in Nonfarm Payrolls for May recorded an increase of only thirty eight thousand new jobs against expectations of one hundred and sixty thousand. Investors interpreted the data as bearish for GDP growth and therefore bullish for bonds. With a corresponding drop in the Labour Force Participation Rate, general sentiment in the market decided fewer jobs were on offer and people had given up looking for work.

This interpretation appears to be incorrect for two reasons;

1. The US is experiencing significant demographic change, as its population ages and every year more baby boomers retire and voluntarily leave the work force. This demographic change, rather than the market’s general interpretation that young working age candidates are “giving up” because of a lack of jobs, is in our opinion, responsible for the data.

2. In light of recent job vacancy data released after the payrolls data, it appears US job vacancies have never been higher. This also casts doubt over the markets theory that able-bodied unemployed candidates have given up looking for work and suggests that through the demographic process of an ageing population, there’s an increasing shortage of workers to employ.

The following chart illustrates the number of job vacancies in the United States over the past 16 years;

The next chart illustrates the percentage of total US population employed since 1960.


When we consider the changes brought by an ageing population against this data, it appears logical to conclude aged workers are leaving the work force at a time when job vacancies are at an all-time high. Looking at this in the context of the previous chart showing the percentage of the US population currently employed, it appears the US are approaching full employment.

This point is validated by observing long-term data for the unemployment rate;

It is our view that the US labour force has undergone significant change since the low in unemployment recorded in 1968. To start, the percentage of women in the work force has increased significantly as has the overall percentage of the population employed. Now we are experiencing the beginnings of a relative shrinking in the size of the working age labour force and therefore full employment is now an emerging reality.

Historically, the United States has operated as the “bellwether” for global interest rate moves. It now appears that post GFC, the US interest rate policy and market direction is following, not leading.

However in the US we see consistent population growth combined with the monetary expansion of the post GFC recovery. Clearly this scenario is a legacy of the GFC and a function of economic weakness prevailing in economies such as China, Japan and the EEC. Considering the data presented here, it is our view that the US will soon break free from the forces depressing interest rates and inflation in their economy. Combine this with the demographic trend of an ageing population driving a shrinking labour force and improving retail sales data and the case for an emergence of inflation and continued improvement in labour market data becomes an expected reality.

Phil Carden

Portfolio Manager

Published: Thursday, July 07, 2016

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