Much has been in the news and on the minds of investors about a weakening US economy. Several developments in October helped to temper these fears, leading to a 3.3% rise in the S&P 500. Trade talks showed some signs of positive momentum, with the US and China announcing a “phase one” trade agreement. Better than expected corporate earnings and economic data provided evidence that the narrative of the slowdown may have been overstated. Lastly, the Fed cut interest rates for the third time this year while increasing purchases of treasuries; both measures make credit easier to obtain and boost the money supply.
The latest economic data continues to highlight the strength of the US consumer and the dynamism of the US economy. One of the tailwinds powering the economy forward has been the recent rise in the labor participation rate, which measures the percentage of people employed or actively seeking work in the population. As you can see below, prime age (25 – 54 years old) participation peaked in 1999 at 84.4% and steadily fell to 80.6% in 2015. Four percent doesn’t sound like much, but it amounted to approximately 5 million fewer people at work.
The simple reason for more Americans getting back into the work force: higher pay. After nearly two decades of stagnation, median workers have finally seen real earnings growth (inflation adjusted). The unemployment rate is already around all-time lows (3.6%), but the participation rate still has the potential to push the economy ahead with minimal inflation pressures. In order to continue enticing people into the work force, wages will need to keep going higher, especially among lower and middle wage earners.
– Jared Ruxer