U.S. Markets closed

Labor force participation rates: A bear market for men and women?

Marc Wiersum, MBA

Is Baby Boomer retirement more good news for stocks and labor markets? (Part 6 of 13)

(Continued from Part 5)

Women enter the workforce in 1970—and leave after 2008

As women entered the workforce more aggressively post-1970, these Baby Boomer women contributed to the growth in the overall labor market in the USA, and they also played an increased role in supporting consumption and economic growth since that time. While the declining trend in labor participation rate among women has fallen from the 2008 high of 61.3% to the recent low of 58.6%, readers should note that this level of decline is still much smaller than the decline in the rate of men, from 75.5% to 72.0%. Adding in the 0.30% growth in discouraged workers, we find a labor pool that has shrunk by nearly 4.0% overall since 2008. The conclusion we can draw from this data is that women are outperforming men in terms of their retreat from the labor market. Perhaps male Baby Boomers on average were encouraged to pursue early retirement more than women for financial or health-related reasons. This article considers the growth in women participating in the workforce and the implication for equity investors.

To gain a broader understanding of the other macroeconomic factors supporting the economic and investment-related views in this series, please see Must-know 2014 US macro outlook: The crack in the debt ceiling.

Women in the workforce

The Department of Education estimates that, for the current graduating class of 2013, women will earn 61.6% of all associate’s degrees, 56.7% of all bachelor’s degrees, 59.9% of all master’s degrees, and 51.6% of all doctor’s degrees. Overall, 140 women will graduate with a college degree at some level this year for every 100 men. Much debate surrounds the current 77% number—the percentage of male wages earned by women in the USA, though profession choices and a variety of other factors provide significant skew to the data (Baby Boomers in law, finance, and medicine). As the Baby Boomers leave the workforce, it’s likely that the growing number of highly educated women in the workforce will lead to a significant decline in the 77% gap, as reported by the U.S. Census. Accordingly, it’s likely that women will play a larger role in supporting consumption and economic growth in the U.S. economy.

We need all the help we can get

As we note in the following article in this series, the U.S. economic growth rate has been in a long-term decline post-1970—with special attention to the post–Dot Com 2001 data. Even with all of these Baby Boomers in the labor markets—and women’s participation at its peak levels—something happened. Investment data fell from 8% of GDP to closer to 4%, and despite the digital revolution, productivity growth rates, or real output per hour, continued to decline from 1.5% to just under 1.0% currently.

Yikes. That’s not good.

To see how both population growth and productivity growth continually fail to lead to strong economic growth, please see the next article in this series.

To see how the “discouraged worker” impacts U.S. financial markets compared to the Baby Boomers generation dynamics, please see Is the discouraged worker a lagging indicator for the S&P 500?

Offsetting investment declines

As we discussed in a prior series, U.S. investment: Have capitalists gone on strike? the ongoing decline in fixed investment in the USA from historical levels of 8% of GDP to closer to 4% of GDP has been just about enough to account for the excess 4% of unemployment in the USA post-2008. As we discussed earlier in this series, the outsourcing of work to China doesn’t account for much of this decline in investment. In theory, the U.S. should be investing in higher–value-added economic activities. For some reason, it apparently hasn’t.

As we noted earlier in the third article in this series, economists such as Paul Krugman consider the fundamental problem with the currently weak economy and labor market the result of weak demand more than China’s supply. Should Krugman and company convince Washington to embark on new demand-side stimulation policies, perhaps fixed investment data will return to historical norms, and economic growth will bounce back well above trend growth, making up for lost time post-2008. Failure to do something in this regard will make 2008–2018 bear a striking resemblance to Japan’s lost decade post-1990 (currently working on decade #3, with net government debt at 135% of GDP, and flat economic growth).

A credit comment: CIT Group—Stock doubles since 2010, EBITDA improves credit

CIT has a market capitalization of $9.57 billion (the value of all its equities) and is considered a high yield credit. Its debt is considered below the investment-grade cut-off of “BBB” rating, as it’s in the BB (junk bond or below–investment-grade) category. Reducing the firm’s $23.17 billion of debt by the $6.18 billion of cash holdings leaves approximately $17 billion of net debt, and a 1.77 debt to equity ratio. CIT Group currently has a February 19, 2019, senior unsecured bond yielding 3.46%, versus Sprint’s August 15, 2007, senior unsecured bond yielding 2.95%, Verizon’s February 15, 2008, senior unsecured bond yielding 2.00%, T-Mobile USA’s February 19, 2019, senior unsecured bond yielding 3.00%, and Caesar’s Entertainment’s June 1, 2017, senior secured bond yielding around 11.00%.

An improvement in labor and credit conditions would likely improve CIT Group’s credit rating—though with a BB- senior unsecured bond yielding 3.46% versus T-Mobile USA’s BB- company-guaranteed bond yielding 3.00%, CIT’s unsecured yield reflects a strong fundamental credit (Bloomberg & Capital IQ, December 31, 2013 Quarter).

Equity outlook: Cautious

Should the debt ceiling debate re-emerge after the mid-term elections in November, and macroeconomic data fail to rebound in sync with record corporate profits, investors may wish to consider limiting excessive exposure to the U.S. domestic economy, as reflected more completely in the iShares Russell 2000 Index (IWM). Alternatively, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index (IWD).

Plus, even the global blue chip shares in the S&P 500 (SPY) or Dow Jones (DIA) could come under pressure in a rising interest rate environment accompanied by slowing consumption, investment, and economic growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY) or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs. Until there’s greater progress on the budget and federal debt issue, and consumption, investment, and GDP start to show greater signs of self-sustained growth, investors may wish to exercise caution and consider value and defensive sectors for investment, or individual companies such as Wal-Mart Stores (WMT).

Without sustained improvement in economic growth data, there’s little doubt that the debt level issue and tax reform will be a big issue later in the year. Current economic data noted in this series suggests that the probability of the 2013 sequester issue returning—in one form or another—could be higher than many think. The data is simply not that robust—yet.

Equity outlook: Constructive

However, if investors are confident in the ability of the USA to sustain the current economic recovery as a result of the improving macroeconomic data noted in this series, they may be willing to take a longer-term view and invest in U.S. equities at their current prices. With the S&P 500 (SPY) price-to-earnings ratio standing at 19.65 versus the historical average of around 15.50, the S&P is slightly rich in price—though earnings have been solid. However, with so much wealth sitting in risk-free and short-term financial assets, it’s possible to imagine that a large reallocation of capital that is “on strike,” including corporate profits, into long-term fixed investments. This could lead to greater economic growth rates and support both higher equity and housing prices as well. In the case of a constructive outlook, investors should consider investing in growth through the iShares Russell 1000 Growth Index (IWF) or through individual growth-oriented companies such as Google (GOOG).

Continue to Part 7

Browse this series on Market Realist: