We Could Soon See Job Creation Fall off a Cliff…

Chris Brooks via Flickr

Let’s do a quick thought experiment…

Imagine you’ve got two people in the workforce. Let’s say one is 40 and the other 65.

When both are gainfully employed, the unemployment rate is 0%. We’re enjoying full employment within the labor pool.

During the recession, the 40-year-old loses his job. With only two people in the labor pool, that means only half of the working age population that wants a job, has a job. Unemployment is at 50%. Ouch.

As the economy recovers, the 40-year-old once again finds work. However, he’s earning less than he was before.

Great news, sort of. The economy is once again at 100% employment and everyone cheers that the unemployment numbers saw such a major jump, even though average income is down.

But…

A few months later, the 65-year old retires. His departure, however, doesn’t create an unemployment level of 50%. Employment remains at 100%.

How is That Possible?

While it’s true that while the retiree is in the potential labor force, he’s choosing not to participate by retiring. So, the workforce has shrunk by one person, meaning that the remaining person is now the entire workforce. Seeing as he’s gainfully employed, everything looks rosy!

Only, is it really? In our example, the economy will slow even though unemployment looks great.

Yes, I realize that I’m oversimplifying something much more complicated here. But my point (and warning) couldn’t be any clearer…

As the boomers leave the economy by the millions, even if we replace them, the workforce won’t grow substantially, and our economy will remain stuck in the ditch!

There is no way Trump will be able to achieve the 3% to 4% growth he’s promising because workforce growth is declining as baby boomers shuffle into their retirement years in staggering numbers, more than offsetting the millennial generation entry for several years.

All these fantastic unemployment numbers we’ve been seeing each month? They’re simply lipstick on a pig.

Workforce growth – from the natural forces of people entering at age 20 and exiting at age 63 on average – is in decline into the early 2020s. After that, it only grows slightly above zero, at best, for decades to follow.

Our productivity, what with the aging of our society, is back to 0.4%. That’s nearly as low as what it was near the top of the Bob Hope generation retirement cycle in 1983 and at the bottom of the spending wave back then.

And that’s the crux of our problem.

That right here is why it’s demographically impossible for Trump to succeed in stimulating 4% growth.

Sure, we’ve now moved to as low as 4.6% unemployment. That’s well into the full employment zone between 3.8% (2000) and 5.0% (1989) range. In the last peak in 2007, the unemployment rate hit a low of 4.4%, just below where we are now.

However, and this is a big one: We’ve simply hired back most of the workers we lost in the great recession! Those 150,000 to 200,000 monthly jobs numbers we keep seeing cannot last more than several months, at most. And when they suddenly drop to 50,000 (or less), that could be the shock that causes a sharp bubble crash of 30% to 40% into the fall.

Some economists would argue that there are still people that left the workforce that are no longer looking for work and we could draw them back in. I say good luck on that one. Look at this next chart:

It shows that labor force participation peaked between 1998 and 2000 at 67% and has been falling ever since (note the inverted scale). This correlates directly with the rising retirement wave for the massive baby boom on a 63-year lag.

That high of 67% occurred just as the baby boomers were starting to retire and near the lowest unemployment rate of the entire boom at 3.8% – no accident.

It doesn’t take a genius to get that rising retirees means lower labor force participation, especially when it predictably exceeds new entry by younger people.

This chart indicates that participation will fall to around 58% from the current level of 62.6%! This would occur into around 2024, which is the peak of the 63-year lag for baby boom retirement.

That’s another potential 4.6% loss of our workforce – or 0.58% per year over the next eight years – without a recession or depression. That’s 920,000 people a year just gone from the workforce! How do you offset that with lower taxes and who are you going to build these new infrastructures for? Not older people who need less of everything except health care… and nursing homes.

If we’re going to build new infrastructures, nursing homes should be it!

There is Also Another Factor…

As two-worker households see their kids leave the nest, one will often choose to retire early or switch to part-time work. That has been a part of the drop-out rate thus far… These people aren’t coming back, either.

So, here’s the reality. By sometime this summer or so, we could hit 4.4% or lower unemployment and then suddenly see job growth drop to 50,000, if not lower… with no obvious recessionary signs or economic crises at first.

How Will Markets Feel About Trump’s 4% Growth Revival?

I smell the typical, first dramatic 2- to 3-month typical bubble crash of 30% to 40% when this happens, most likely between late July and late October of 2017.

How do you like them apples?

I still say Trump will likely be stumped or dumped by the end of this year.