Monthly unemployment data suggests that the nation is enjoying a solid economy with a positive outlook. On the other hand, work force participation remains at historically low levels of approximately 63% and the latest job openings data stands at the highest level since this metric began in 2000. What is going on and why should investors care?
Based on a review of a wide range of commentary, it appears that no one has a high confidence theory as to why there is such a large discrepancy between the labor force participation rate and the unusually high level of unfilled job openings. Some of the theories include: a mismatch between job requirements and worker skills, excessive employer requirements such as seeking more education than the job requires, more potential workers simply choosing not to work for a variety of reasons, generous government safety nets that often penalize workers accepting low paying jobs and a lack of acceptable public transportation between potential employee residences and job locations.
This is not a complete list but is intended to highlight the complex nature of the problem. It is going to be difficult to find an effective solution until there is a better understanding of the issues.
The persistence of relatively low work force participation in the face of what would appear to be a generally positive jobs market poses some real concerns for investors. Low work force participation is probably contributing to generally lackluster consumer spending. This in turn, may be one of the reasons that corporations are hoarding cash instead of investing in new capacity.
During the recent economic recovery, corporate earnings have been relatively strong, despite less than robust revenue gains, as managements have cut costs and improved margins. This can not continue indefinitely. Equity markets would probably benefit from improving consumer spending, which should drive stronger top line growth.
On the positive side, corporations are very likely to do what is required to bring in the people they need. Recent upward movement in wages may reflect a start. As more people are enticed into entering the work place, consumer spending is likely to improve, boosting overall demand and stimulating a recovery in capital spending.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®