Recent economic data is showing the impact of tightening measures by the Federal Reserve (Fed). Various indicators show that the manufacturing sector is in contraction, while retail sales produced negative growth over the last two months. Despite ongoing layoffs in the technology and financial services sectors, most labor market indicators are still displaying a robust labor market. The tight labor market is not just a U.S. phenomenon, as the unemployment rate is at record low in Europe, even as the continent copes with a war and energy crisis.
In the U.S., the main reasons driving a chronic shortage of workers are 1) labor-force participation, 2) early retirements and 3) immigration.
As you can see from this week’s Chart of the Week, the labor-force participation rate has been in a downtrend over the last two decades, as the demographics of the U.S. population have trended older and led to an aging workforce. Currently, the participation rate is about 1% lower than the pre-pandemic level, which equates to about 1.6 million workers since the total labor force in the U.S. is approximately 165 million.
The Fed’s research also estimated that 2 million “excess retirements” due to the pandemic would occur by the end of 2022.1 The reality that the pandemic changed many people’s priorities in life has contributed to why we see an elevated retirement rate among the over-50 age group. In response, many companies are offering flexible work schedules to entice employees away from potential early retirements.
Additionally, the pandemic has created a gap in immigration. Fed Chair Jerome Powell said, “The combination of a plunge in net immigration and a surge in deaths during the pandemic probably accounts for about one-and-a-half million missing workers.”2 Research shows that working-age, foreign-born employees in the accommodation-and-food-services industry (a subsection of leisure and hospitality) saw the greatest decline during the pandemic, with some estimates indicating there are now millions fewer in this group compared to pre-pandemic levels.3
Key Takeaway
The labor market has remained tight after record rate hikes. We are seeing weakening economic data in recent months, which should eventually translate into a weaker labor market. The labor market’s weakness is a key for inflation outlook and Fed policy. We will be monitoring this situation closely.
Sources:
1Source: Board of Governors of the Federal Reserve System- "The Great Retirement Boom": The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation; 11/30/22
2Source: Board of Governors of the Federal Reserve System- Inflation and the Labor Market; 11/30/22
3Source: U.S. Bureau of Labor Statistics- About the Accommodation and Food Services Sector; 1/24/23
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.
