The 10-year U.S. Treasury yield (above) has been drifting higher, although it remains within a broad range that it settled into after the post-COVID Bond Apocalypse. Since I am not offering unsolicited investment advice to random strangers on the internet, I officially do not have a yield forecast. That said, the bond (price) weakness is somewhat surprising in retrospect given the economic uncertainty. However, the surprise factor is somewhat reduced by the reality that we now have a White House that is pushing almost every lever it can to raise prices. My bias is based on the post-1990 period where growth trumped inflation for bond yields — since inflation is a lagging variable. The difference is that we did not then have a lot of pro-inflation policymakers in power.
The (relatively) recent labour market data coming out of the United States has not been great. The above figure shows a measure that I like looking at — the employment-to-population ratio.
In order to give some background on the numbers, it is the (estimated) number of workers in paid employment in the economy divided by the population in the working age population. Since not everyone in that population is interesting in working/looking for work, the unemployment rate is not 100% minus the employment ratio. Instead, the unemployment rate is the percentage of the participating population (to be discussed next) that is employed.
The level of the employment ratio is not necessarily meaningful — as the demographics of the working population change, the employment ratio will reflect that. For example, the ratio was typically around 55%-58% (not shown) in the 1950s and 1960s (before when women (re-)entered the formal workforce in size). In the past couple of decades, the ageing population will reduce the ratio as the mix of population moves to a higher weighting in the cohorts near retirement age. Nevertheless, the weakness of the employment ratio is not a great sign — the ratio managed to rise in the 2010s during the expansion, and the demographic situation was not that radically different seven-eight years ago.
The American Labor [sic] Force Participation rate (above) generated a bit of interest. The overall participation rate (black line) plunged, generating some stories about potential workers fleeing the labour force.
Alexander Bick at the Saint Louis Federal Reserve wrote a short article dissecting the plunge in the participation rate. There were three factors found:
There was a statistical artefact that resulted from a benchmark changes of population estimates. Last year’s changes raised the participation rate, this year’s changes reversed that.
There is an effect due to the ageing population.
There remainder was a dip that represents less than half of the decline of the participation rate that might be a concern.
The ageing population issue is best illustrated by contrasting the whole working age population participation rate to the prime age (25-54 years) participation rate (red line). The prime age strips out most students, as well as oldsters (like myself) who are drifting towards qualifying for an old age pension. Although the prime age participation rate has dipped, the movement is less dramatic. The level gap in July was 22% (83.4% versus 61.4%) which explains the importance of demographic shifts out of the prime age population.
The non-excitement of the change in the participation rate is not perhaps itself of great interest, but I think it provides a justification to dig out the charts showing differences between the prime age and (total) working age populations. When the baby boom demographic was prime age, what was happening in the oldster cohorts did not have a lot of statistical weight. We now have a lot of weight on a population that is quite happy to drop out of paid employment if given the opportunity. This might change some intuitions about labour market behaviour. For example, it was a standard belief that a hot labour market will pull in people who stopped participating (thus giving the economy greater room to grow before hitting capacity constraints). Now, it may be that if things go well, some people will take advantage of the situation and retire earlier.
One could argue that the decline in the employment ratio (which I like to look at) is just downstream of a declining participation rate due to an ageing population. My response is that the participation rate is going to be a mushy variable, as it is now being influenced by near-retirees who are going to act in ways that do not conform to earlier eras where the prime age demographic was dominant. (Correspondingly, the unemployment rate loses some of its value.) The employment ratio is telling us how many people are working, which directly relates to the business cycle.
Although these effects should matter for determining what is happening to labour market constraints, I still feel that this is likely going to be a second order inflationary effect when compared to the flow of oil through the Strait of Hormuz being throttled down.
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