Recap & Macro Outlook: US Participation Reconsidered

Michael Rudd, CFA | President, CEO and Portfolio Manager

Figure 2 to the right was featured in our Outlook Vol 8 Ed 11 (here) at the beginning of June. At that time, we wrote participate rates for prime aged working males in the US (blue) had dropped well below other industrialized nations and concluded that, while the US now has more jobs available than workers seeking, if participation rates increased, wage growth and inflation could be lower than expected. We found a paper this week that adds another layer to the discussion. A portion of the abstract is below:

“… about half of prime age men who are not in the labor force (NLF) may have a serious health condition that is a barrier to work. Nearly half of prime age NLF men take pain medication on a daily basis, and in nearly two-thirds of these cases they take prescription pain medication. Labor force participation has fallen more in areas where relatively more opioid pain medication is prescribed, causing the problem of depressed labor force participation and the opioid crisis to become intertwined.” (Krueger, Princeton University)

This is somewhat depressing. Along with demographic, job polarization and health insurance trends, we conclude that low participation rates for prime aged US males could be structural; therefore, may not reverse to pre-2007 levels. This could keep the labour market tight and ultimately contribute to inflation. In Figure 1 to the right, we present the 10-2 yield curve, which is the difference between short and long-term yields on US Treasury bonds. We expect short-term rates to increase with inflation and, other things being equal, come closer to long rates. This will result in a continued flattening and potentially an inversion of the yield curve over the coming years. Inflation, the term structure of interest rates and the discount rates we use to value all assets, are inexorably linked. These inputs are important for our portfolios so we will continue to track this closely.

“This means that” we will continue to focus on investing in real businesses but are also clearly focused on inflation data, interest rate expectations and the yield curve as a harbinger for a potential slowing of the economy in the medium term.

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