PMC Weekly Review - August 7, 2015
A Macro View - Peeling Back the Layers of the U.S. Employment Situation
July’s unemployment numbers came in today at 215,000 which was slightly below estimates (223,000) and the unemployment rate remained unchanged at 5.3%. That said, economists have raised concerns if the unemployment numbers truly reflect the employment situation in America. The argument is that the numbers do not account for the underemployed or those that have dropped out of the labor force.
In order to account for these two factors, economists typically analyze a couple other pertinent statistics. One statistic they will be looking at is the unemployment rate plus underemployment rate, which includes those workers who work part-time yet wish to be full-time or are skilled laborers working unskilled jobs (this rate dropped from 10.4% to 10.3%).
In addition, the labor force participation rate factors into a deeper evaluation of the employment situation. That is, how many Americans are in the work force or looking to join the work force. A decline in this rate accounts for those who have dropped out of the workforce all together. Combining all these metrics shows a more complete picture regarding the state of employment within the United States. While it seems the overall employment situation in the U.S. has improved according to the unemployment numbers released today, it does not paint as rosy of a picture as one would believe.
If we look at the labor force participation rate, on the surface the unemployment story is not as positive as a 5.3% unemployment rate appears. Since the recession of 2002 until the credit crisis of 2008, this rate averaged around 66% with little volatility; meaning 66% of the adult population in the U.S. was either employed or participating in the work force. Since that time, the number has declined steadily to 62.6% meaning over 3% of the U.S. population stopped working and is looking for employment. Of that 3%, roughly half of those workers appear to be baby boomers who are retiring early but that still leaves about 1.5% of Americans who have dropped out of the work force. This number is concerning as it becomes harder for the long term unemployed to re-enter the work force which will impact these Americans for years to come and also reduce their ability to contribute to the overall economy. In addition, given the low amount of retirement savings for baby boomers, there is concern that those retiring early will be less likely to have the means to support themselves during their entire retirement.
The other unemployment rate economists are closely following is the unemployed plus underemployed. This rate has come down considerably in recent periods, though it continues to remain elevated when compared to pre-credit crisis levels. In particular, the current unemployed plus underemployed rate sits at 10.3% versus a rate of 8.3% in June of 2007. Meanwhile the unemployment rate, currently at 5.3%, is nearing the 4.6% rate observed in June of 2007. A higher percentage of underemployed workers is concerning as these workers tend to fall behind in both pay and advancement opportunities and ultimately reduces their ability to contribute to the overall economy. Though the rate remains elevated, one positive is that the trend line has declined almost 40% from the peak levels in 2009.
Finally, when looking at all three unemployment statistics, these numbers are important indicators because they capture a segment of the U.S. population who are increasingly being left behind. Given the U.S. economy is primarily driven by personal consumption, consumers dropping out of the workforce or who are underemployed have a real economic impacts in addition to the negative social consequences. While our unemployment rates appear stronger than the majority of the developed world, the reduced labor participation and underemployment rates are concerning as they continue to represent a headwind for future economic growth. It is important that investors realize the employment picture being painted might not be as rosy as it seems and to keep an eye on the entire employment situation in the U.S.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2015 Envestnet. All rights reserved.