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Labor Force Participation Rate At Its Lowest Since The 1970s

Brent Nyitray, CFA, MBA

Takeaways From The December 2014 Employment Situation Report (Part 3 of 5)

(Continued from Part 2)

Unemployment is dropping, so why don’t citizens feel better about the economy?

The unemployment rate is the most important data point out there right now, and it’s been falling. The economy has created 1 million jobs in the last four months, and yet people consistently think the economy is on the wrong track. Why is that?

The reason is the labor force participation rate.

Remember the official definition of unemployment we looked at in Part 2 of this series? 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. You’ve dropped out of the labor force as far as the government is concerned. Of course, you are still unemployed. But for the purposes of the official unemployment rate, you aren’t.

The labor force participation rate

The labor force participation rate is the ratio of the labor force against the demographic cohort. In other words, it’s similar to the employment-to-population ratio the Fed uses but takes into account demographics.

As you can see from the chart above, the labor force participation rate increased steadily from the early 1960s through the early 2000s as women entered the labor force. Since the Great Recession, however, the labor force participation rate has declined. It’s back to levels we haven’t seen since the late 1970s.

During December, the labor force participation rate fell 10 basis points to 62.7%. This is the lowest it’s been since the late 1970s.

Implications for mortgage REITs

The open question for the REITs (real estate investment trusts) 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 makes a difference for wage growth and also for the non-inflationary growth potential of the economy.

The key is how fast rates will go up, which will affect mortgage REITs including Annaly Capital Management (NLY), American Capital Agency (AGNC), Capstead Mortgage Corporation (CMO), MFA Financial (MFA), and Two Harbors Investment (TWO).

If the labor force participation rate increases, wage pressures will remain muted. This is good for interest rates, but not necessarily for workers, who haven’t had a raise in years. If the labor force participation rate remains static, we’ll start seeing upward pressure on wages, which could force the Fed to act sooner.

Continue to Part 4

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