Labor Force Participation Rate Ticks up as Labor Force and Population Grow
January's Mixed Bag: Interpreting the Latest Jobs Report
Unemployment is dropping, so why don’t people feel better about the economy?
The unemployment rate is the most important data point out there right now, and the rate has been falling. So why doesn’t the average citizen feel better about the economy? Let’s look to the labor force participation rate to answer this question.
To be considered unemployed, you have to make an effort to get a job. If you haven’t done anything in the prior month, you’re no longer considered unemployed. As far as the government is concerned, you’ve dropped out of the labor force. Of course, you are still unemployed, but for the purpose of the official unemployment rate, you’re not.
Labor force participation rate
The labor force participation rate is the ratio of the labor force against its demographic cohort. In other words, it’s similar to the employment-to-population ratio the Fed uses but it takes demographics into account.
As you can see in the chart above, the labor force participation rate rose steadily from the early 1960s through the early 2000s as more women entered the labor force. Since the Great Recession, however, the labor force participation rate has fallen, and now it’s back to levels we haven’t seen since the late 1970s.
In December 2015, the labor force participation rate rose to 62.7%, just off its lowest point since 1977. The labor force rose from 157.8 million to 158.3 million while the population rose from 251.9 million to 252.4 million during the month.
To put the change in the labor force participation rate into perspective, consider that roughly half the gains attributed to women entering the labor force, starting in the 1960s, have been lost. This is one of the biggest reasons the economy remains below par. Yes, Baby Boomers are retiring, but the Millennial generation is larger and is having trouble replacing them.
Implications for mortgage REITs
The open question for REITs and the Fed is whether these discouraged workers, particularly at the older end of the spectrum, are ever coming back into the labor force. This is the key question the Fed is facing right now.
On one hand, shrinking the available labor pool will put upward pressure on wages at the margin. The offset is that unemployed or early-retired Baby Boomers won’t be spending much. How this pans out for inflation remains to be seen.
Note that the latest NFIB (National Federation of Independent Business) Small Business Survey reported that companies are having a difficult time finding qualified workers. Interestingly, the JOLTS (Job Openings and Labor Turnover Survey) data show job openings close to 2000 levels.
Detrimental for mortgage REITs
If we see inflation make its way back, it would be the most detrimental for mortgage REITs (real estate investment trusts) with large levered portfolios of agency mortgage-backed securities, especially Annaly Capital Management (NLY) and American Capital Agency (AGNC). These two REITs are the most vulnerable to rising inflation. Inflation will drive long-term rates higher, which investors can trade via the iShares Barclays 20+ Year Treasury Bond ETF (TLT).
Non-agency REITs such as Two Harbors Investment (TWO) should actually benefit somewhat from moderate inflation since it generally boosts real estate prices and helps out debtors. Increasing real estate prices are generally good news for origination-focused REITs such as Nationstar Mortgage Holdings (NSM).
Meanwhile, investors interested in gaining exposure to the mortgage REIT sector might consider the iShares Mortgage Real Estate ETF (REM).
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