Tag Archives: demographics

Between Jobs

Are we working hard, or hardly working?

Man shoveling at construction site. Photo: Igor Ovsyannykov. Source: Fancycrave

Both. The unemployment rate declined to its lowest level since 2001. Employers added jobs for the 80th straight month – the longest such streak on record. Wages are up 2.5% from a year ago – more than the 2% wage gains we were seeing last year, and significantly more than the 1.5% inflation rate.

But unemployment fell because people are leaving the workforce. The labor force shrank by almost half a million people in May, as baby-boomers retire and others leave the job market. Why are they leaving? That’s a good reason. The labor force participation rate for prime-age workers, aged 25 to 54 years old, has been falling for the last 20 years, and especially dropped off after the Great Recession, although it’s recently started to recover. But this last month didn’t help.

Source: St. Louis Fed

My biggest worry is the declining rate of job creation. Job growth in terms of the number of jobs seems steady, but the growth rate has declined modestly as a percentage of the total job market. Just two years ago the rate of job creation was accelerating, growing at more than 2.2% per year. Now it’s about 1.5%

Source: BLS

Maybe it’s the “retail apocalypse”: over the past four months, online sellers have added 12,500 jobs, while the rest of the retail sector has cut 92 thousand positions. Department stores have been especially hard hit. It’s worth keeping an eye on the retail sector. There are more than 16 million retail jobs in the US. Or maybe employers are just running out of people to hire. The number of job openings is still near a record level, even as the rate of hiring seems to be slowing.

While May’s employment report was disappointing, the job market isn’t in trouble yet. The unemployment rate is very low, and employers are creating more jobs than there are new workers entering the market. It’s really too soon to start worrying. But it’s not too early to start paying attention.

Douglas R. Tengdin, CFA

Inflation Nation (Part 1)

Why isn’t inflation coming back?

Year-over-year CPI change. Source: Bloomberg

In the ‘60s and ‘70s inflation grew out of control. Nixon’s price controls didn’t stop it. But it settled down after Paul Volker’s restrictive monetary policy and Alan Greenspan’s careful management of the Fed. Economist Milton Friedman famously claimed that inflation is “always and everywhere a monetary phenomenon.” But after the financial crisis, inflation dipped below zero and the Fed flooded the economy with money. Many feared that inflation would come roaring back.

But this didn’t happen. Prices have been pretty stable. In fact, inflation still seems to be on a downward trend that began around 1990. Why?

A lot of theories have been proposed—the Fed’s money just “sat in the banks,” the rate that money circulated through the economy fell, that assets have inflated via bubbles while consumer goods have stagnated. But these seem to miss the point, or to be tautologies. The economy’s money supply has expanded dramatically, but consumer prices have grown at a snail’s pace.

M2 growth and Core CPI growth, year-over-year. Source: FRED

It’s not enough to say that monetary policy acts with long and variable lags. M2 is the most common measure of transactional money—what we use to purchase goods and services. It’s been growing faster than 5% for over six years. Both core and headline inflation, however, remains extremely low.

The problem must lie in the theory—the theory that dictates that inflation is exclusively a monetary issue. There must be elements of the real economy keeping inflation in check. I see three large-scale, long-term issues. First, the US economy is far more integrated with the rest of the world than ever before. And we do not have good data on global money supply. Second, global demographics limit demand. Populations around the world are aging—in some cases, quite dramatically. This is because life-expectancy is rising while fertility rates are falling. This is happening in almost every country around the world, but especially in high-demand countries like Europe and Japan. Since 1980, the share of the world’s population over 60 has grown from 8.5% to 12.3%, and older folks don’t consume as much as younger people.

Source: UN

Finally, technological innovation continues to challenge traditional economic equations. The cost of distributing a movie to a billion wired households is only marginally greater than streaming it to a million homes. Information is not conserved, the way that material and energy are. Digital information can be copied and multiplied for almost nothing. This radical change in the economy continues to disrupt business models, from record stores to hotels and restaurants to airlines. There’s a lot less need to travel when videoconferencing is almost like being there in person.

This has profound investment implications—from Fed policy and bond yields to business models, profit margins, and stock prices. Although difficult for monetarists to confront, the data from the last 20 years seem conclusive: inflation is—at least partially—real.

Douglas R. Tengdin, CFA

Chief Investment Officer

Swimming Upstream

What are we missing?

Great Barracuda. Photo: Clark Anderson/Aquaimages. Source: Wikipedia

There’s a story about two young fish swimming upstream who meet an older fish heading downstream. The old fish nods at them as he goes by and says, “Morning boys. How’s the water?” The two young fish swim on a bit. Eventually one of them looks over at his friend and asks, “What’s water?”

Sometimes the most obvious, important realities are the ones that are the hardest to see. Most of what we observe comes from inside us—from how we think about the world, what mental categories we use. It takes a lot of energy for a fish to think about what it’s swimming in.

So how’s our water?

One big issue we ignore is the long-term deflationary trend. The internet is deflationary. As connectivity goes up, prices fall lower and lower. That’s because information can be multiplied for almost nothing. I stream “free” movies off of Amazon Prime because it is so convenient. Wikipedia and Wikimedia are free. Google makes searching for what I want easier than ever. And it’s really simple to compare prices.

The same can be said for global demographics. It’s a truism to say that the world is getting older—that falling birth rates and improved medical care are causing median ages to rise everywhere. But what does this mean? Older folks don’t need as much stuff as younger folks. They don’t need as much housing, they don’t go out as much, they don’t need as much education. Demand falls as populations age.

Source: UN, Wikipedia

It doesn’t matter whether Donald Trump pulls out of TPP or builds a wall, the near-zero-cost of information and aging global population will continue to drive down prices. There’s more supply and less demand. This means that it will be hard for inflation to take off in any sustained way.

This has profound implications for stocks, bonds, real estate, pensions, and all kinds of businesses. The ‘30s to the ‘70s were the age of rising inflation. The ‘80s to the ‘10s were a time of falling inflation. Will the next era be one of low-flation or deflation?

Douglas R. Tengdin, CFA

Chief Investment Officer


Why is the economy growing so slowly?

Source: St. Louis Fed

Since the Great Recession, the economy has never gotten back into high gear. We’ve always seemed to be teetering on the edge of another downturn. Quarterly economic growth has averaged 2%, while a normal recovery is usually above 3.5%. Why?

First, the workforce is changing. We are now entering the period where baby-boomers are beginning to retire. Like most things the boomers have gotten involved with, they are transforming retirement. Their family finances may be stretched by having debt from putting kids through college, or because one in four have adult children living with them. Also, the changing nature of health care is changing everyone’s work patterns.

Second, there are some special factors that have made this recovery more difficult. Because the boom was in housing—creating oversupply—lower interest rates have not been able to stimulate the homebuilding sector very much. The Euro crisis and China’s economic restructuring have put a serious dent in demand for US exports. Long-term financial challenges in the States have reduced government hiring.

GDP Composition. Source: FRB Richmond

Finally, there are some long-term trends in productivity that began about 10 years ago. Growth in technology has been centered around software—an informational product—which doesn’t get consumed when someone uses it. My web-search doesn’t prevent you from searching the web. There’s also evidence that much of our newest economic activity isn’t being measured. For example, more pictures are being taken than ever before. But the GDP contribution from photography has actually plummeted over the last decade, as many people use smart-phones to take, upload, and share photos. This is a way that the measured economy is depressed by new technology.

There’s no magic here. Our slow-growth economy hasn’t developed because rates are too low or the Chinese are stealing our jobs or unicorns in Silicon Valley are too greedy. If we want to get the economy moving again, we need to encourage what creates economic growth in the first place: innovation, ingenuity, and productive people.

Douglas R. Tengdin, CFA

Chief Investment Officer

Euro Futures

Is the Eurozone dying?

Photo: Dave Meier. Source: Picography

It’s certainly facing tough times. Economically moribund, most Euro government bonds carry negative interest rates. Countries on the economic periphery still face crushing debt service. Unemployment remains above 10% — the same level it was shortly after the Great Recession. And soon Britain will vote to leave the EU. Who can blame them? Who wants to tie their economic future to a 20-ton anchor?

But bad as things are right now, they were significantly worse just two years ago. Unemployment was 12% and headed higher. Europe was in the middle of a double-dip recession, brought on by the central bank’s attempt to “normalize” interest rates prematurely in 2011. The Eurozone economy was shrinking by 1% per year, and had been since 2011. Now, their economy is growing, the Greek people voted to stay part of the Euro, and there is economic crisis pushing people out. Various groups might be better off by going alone, but getting there is a problem.

Eurozone unemployment. Source: Bloomberg

Absent some calamity, the Eurozone will likely continue in its present form: a monetary union with centralized regulation but most fiscal and political decisions made at the national level. The biggest threats facing Europe right now are the migration of millions of Syrians fleeing civil war and the rise of reactionary nationalist movements. Neither of these directly affects the UK, but any flare-ups over the next month will likely impact the Brexit vote.

There are lots of things to be worried about, globally, but there always are. The Euro created a unified market with over 300 million highly educated producers and consumers. It would be a mistake to bet against it.

Douglas R. Tengdin, CFA

Chief Investment Officer

Moving Out?

Has America’s economy become less mobile?

Photo: Dwight Burdette. Source: Wikipedia

Labor market mobility in the US has declined. It used to be that when an area was depressed, people moved to where there were better opportunities. But following the financial crisis, more folks stayed put and simply dropped out of the labor force—either retiring or going on disability. This has broad implications for wages, productivity, and overall economic growth.

Migration across state lines from areas of high joblessness to areas of low unemployment helps equalize wages rates and employment opportunity. Some places may be harder hit than others, but our mobility has made the US into one large labor market. I myself have changed the state where I live several times when I needed to move to take a new a job. And it was always to a better situation.

But there is evidence that the rate of interstate and intra-state migration has fallen. This trend didn’t start with the financial crisis, but the dramatic decline in housing prices didn’t help. Since at least the ‘80s, workers have been less willing to pull up stakes and relocate. It’s not just that there are fewer young people in the workforce, or that it’s harder to move when both spouses have jobs, or that regulatory burdens associated with hiring and firing have increased, or that people just don’t trust strangers as much anymore. It’s like a combination of factors—some demographic, some regulatory, some cultural—that have pushed labor market mobility downwards.

Source: Brookings

Whatever the cause, this has an effect on productivity and profits. If fewer people are willing to move to where there are jobs, this means some areas of the country will suffer longer downturns, while others could see labor shortages. During the oil boom, convenience-store clerks in North Dakota could earn $24 / hour. But there weren’t as many folks willing to put up with their harsh winters. This means 7-11s in Williston weren’t very profitable.

This is important. If companies can’t make money, they’re not willing to hire new workers. Low mobility could lead, then, to a less dynamic labor market. If we want to get back to a growing economy, we’d better make sure businesses can hire the people that will help them grow.

Douglas R. Tengdin, CFA

Chief Investment Officer

Banking on Change (Part 3)

The world is getting older and more urban.

Source: UN

In 1970 the global median age was 21 and there were 70 people per square mile. By 2020 the median age will be 31 and there will be 150 people per square mile. This means bank customers are looking for different kinds of services. Older customers tend to be wealthier and need ways to manage what they have.

Continue reading Banking on Change (Part 3)

Structure, Schmucture

Where have all the jobs gone?

There’s a cottage industry growing up around the question as to whether current unemployment is cyclical or structural. That is, whether it represents a short-term consumer-based pullback in aggregate demand, or whether it comes from a mismatch between labor skills and the kinds of jobs employers want to fill right now. With over 88 million people not in the labor force, it’s an important question.

It’s important because of the policy implications. Continue reading Structure, Schmucture

A Population Bomb?

Are demographics destiny?

That’s what a couple of researchers sought to find out. Using UN population numbers and economic and capital market data, they looked at 60 years worth of information in 176 countries. Because demographic data are fairly predictable and individual behavior follows a life-cycle pattern of education, production, saving, and retirement, they attempted to fit a mathematical function  to see what the next ten years might look like for different regions of the world.

What did they find?

Continue reading A Population Bomb?