Many market observers have acknowledged that the economic recovery since the Great Recession has been tepid at best. Politicians like to point to the declining unemployment rate that tie into their successful policies in getting Americans back to work.
But, in my opinion, government statistics are misleading in the best of circumstances. One of the biggest concerns I have about the economy is that the labor force participation rate is at generational lows.
The chart below illustrates that the participation rate was 62.9% on January 31, 2015 or at about at a 35-year low. Furthermore, it’s been in serious decline despite the massive economic stimulus provided by the Federal Reserve since 2009!
Let’s dig a little deeper into the numbers because I think they point to some very serious issues facing our economy in the near future. First, from looking at participation by age group, it reveals some dangerous trends.
The 16- to 24-year-old age group is at 55.1%… that’s around the same level it was in 1965. These people represent the future of our country. But, only slightly more than half are actually working.
Sure, some may be in school but the next group is also stagnant.
The 25- to 54-year-olds are at 81.1% participation. In absolute terms this may seem high, but it’s actually been at a virtual standstill since 1990 and has dipped to levels equal to those from 1985.
So, in 30 years, no net progress here!
This is the group that has the most impact on our economy. According to Dent Research, spending accelerates in the 30s to 40s and tops out at around 54 years old.
Finally, the 55 and over year olds are at 40%, which is approximately at 40-year high! Sounds good, right?
Well, not so fast.
People are working well past 65 or so because they aren’t prepared for retirement, incomes are stagnant and they still have bills to pay. They have to work, whether they want to or not!
Furthermore, Dent Research statistics show that these people are past their spending prime. Therefore, the fact that they’re taking up more of the working population doesn’t necessarily translate into large increases in consumption.
According to the Census Bureau, real median household incomes continue to plunge. In 2013, they hit $51,939 per household compared with nearly $57,000 in 1999 and $56,436 near the market peak in 2007 before the last crisis.
These statistics are of major importance because about 70% of the economy is driven by consumption (approximately 70%) and fewer people are actually in the labor force regardless of what the misleading unemployment rate might state. Further compounding this problem is that wages are not growing.
So, what does this mean for investors?
The group that is willing to buy is growing smaller on a daily basis. The demand side of the equation has been squeezed dry. Companies can only cut costs so much and buy back stock to prop up earnings. But eventually, you need sales!
And, who can buy anything if they don’t have a reasonable paying job?! Meanwhile, they’re stuck on the same income they were before the crisis even began eight years ago.
In my opinion, the financial engineering by public companies is stretched to the max. In the absence of accelerating revenue opportunities, the multiple stocks trade at relative to revenue and earnings will begin to flatten out or shrink.
And, that means muted stock returns over the next decade.
Keep reading for more updates on what’s around the corner.