Monday, September 17, 2018

The Imminent Hard Stop

There is an imminent hard stop to jobs growth in the US and a like resultant problem to growth in consumption and economic activity.  The hard stop is simply the outcome of fast growth in employment versus fast decelerating population growth among the potential labor force...resulting in a labor participation rate that will peak as soon as 2019 or as late as early 2020.  And like night follows day, recession will ensue as soon as employment growth abates.


The US labor force participation rate amid 25 to 64 year olds, at midyear 2018, was 75.2%.  In the post 1980 period (since women have entered the workforce en masse), peak labor force participation rates have been somewhere between 76% to 78% (highlighted in the chart below).  At that point, essentially all those capable and/or willing to work are employed.  The remaining quarter of the 25 to 64 year old population are busy with parenting, caregiving, extended schooling, early retirement, incarcerated, on disability, face skills mismatches, or suffer physical or mental challenges that make work unlikely or impossible.  Simply said, if jobs continue growing anywhere near the current pace, by the end of 2019, the labor force will simply not be capable of providing further growth.
If the US population is still growing, why isn't the potential labor force able to provide the labor for a growing economy?  The chart below shows the annual growth of the 15+ year old US population, from 1951 to 2028, through the next decade.  The black boxes with yellow numerals show the total 15+ year old population growth double peaking at +2.9 million persons annually in 1975 and 1998, decelerating to +2.7 million in 2008, and now down to +2.1 million in 2018.  But the bigger story is the demographic that makes up all the growth, shifting from the blue columns representing growth among the 15 to 64 year old population to the 65+ year old population.

As the head of household ages, their average annual income / expenditures and labor force participation rates rise, peak in mid-life, and fall away as they age (chart below).  So if the vast majority of population growth is among the elderly population with income / spending at just half of peak years...and collapsing labor force participation rates, then the growth in the potential labor force is severely impacted.
The chart below shows the annual growth in the potential labor force multiplied by participation rates among the different age segments.  The impact of the population growth shifting from the prime working age population to the elderly has impaired the potential labor force severely and this will only become more acute moving forward.  Peak annual potential labor force growth took place in 1998, adding 1.9 million persons...almost entirely among the prime working age population.  By 2008, total potential labor force growth was down about 15% (from peak) but the shift was well underway with the prime working age population growth down 25% to 1.4 million annually.  By 2018, the potential labor force growth is just 35% of peak.  By 2028, annual labor force growth will be just 15% of that seen at peak growth.
So how does this translate to jobs growth?  The chart below shows annual changes in non-farm payrolls versus the annual change in potential labor force.  Each period of jobs growth, well in excess of the labor force growth, is circled.  The years of peak 25 to 64 year old labor participation rates are highlighted in yellow as these were the years the labor market ran out of potential available laborers...and recession was imminent.
By year end 2018 or latest mid 2019, if employment continues trend growth, the labor force will essentially run out of employable persons.  Said otherwise, the economy will run out of new consumers and this situation of minimal labor force growth will only become more severe over the next decade (and yes, this is factoring in present rates of immigration...if those rates continue slowing, the situation only becomes more acute).

Of course, regardless the steep trouble facing the US...the US is still better demographically and population growth wise than many or even most of the developed and developing nations of the world (detailed HERE).  The US has ample resources to feed and fuel ourselves, care for one another, maintain and promote peace (for a change).  Unfortunately, the nation (and much of the world at large) have decided to believe in financial fairytales and false indicators that require no difficult choices or changes.  However, we still have options  about how we will approach what is likely to be the hardest epoch in this nations history...but the longer we wait, the more difficult and painful the remaining options become.