Morning Briefing | The Labor Market Is Turning Back the Clock to the 1960s
Home Depot tops expectations but sticks to previous full-year forecast – Home Depot's (HD) second-quarter earnings and revenue exceeded market expectations, yet the company remains cautious in its outlook. Despite beating estimates, the home-improvement giant forecast a sales decline of 2% to 5% for this year as there's still uncertainty in consumer-spending patterns, particularly concerning high-value purchases. Chief Financial Officer Richard McPhail said many consumers continue to shy away from significant outlays. However, in a move that may boost investor confidence, Home Depot announced a new $15 billion share-buyback program.
Johnson & Johnson investors to decide on split-off – Shareholders of Johnson & Johnson (JNJ) face a big decision this week, as the pharmaceutical company looks to unload a sizable portion of its $40 billion stake in Kenvue (KVUE). Johnson & Johnson will offer shareholders a "swap" – they can exchange JNJ shares for KVUE shares at a 7% discount. Investors are allowed to swap all, some, or none of their stake in the company, though decisions are due Friday. Participation in the swap will determine the ratio of KVUE shares issued per JNJ stock. The ratio is to be ironed out between now and Wednesday.
Investors dump largest Treasury ETF – Investors pulled more than $1.8 billion from the iShares 20+ Year Treasury Bond Fund (TLT) last week. This mass withdrawal ranks as the largest migration from the fund since March 2020. Investors' sentiment has shifted away from long-term Treasurys as they expect the Fed to hold rates higher for longer. Yields on long-term U.S. debt have risen significantly as a result, impacting demand for the recent 30-year Treasury auction and prompting investors to reevaluate their positions in TLT.
Inflation expectations reach lowest level since 2021 – The latest consumer expectations survey from the New York Federal Reserve showed that inflation expectations decreased for the fourth consecutive month. This marks the lowest level since April 2021. The median one-year expectation fell to 3.5% from June's 3.8%, while the three- and five-year expectations decreased to 2.9%. According to the report, households feel more optimistic about their finances and expect smaller price increases for essential things such as food and housing.
U.S. Steel surges on unsolicited acquisition bids – U.S. Steel (X) rose 33% during midday trading today after the company rejected a $7.3 billion buyout offer from rival steel maker Cleveland-Cliffs (CLF). U.S. Steel rejected the offer in favor of reviewing its other unsolicited proposals. Privately held Esmark also put forth a $7.8 billion all-cash offer, valuing the company at $35 per share, which is a 54% premium to Friday's closing price. However, Cleveland-Cliffs is invited to be part of the review process. It's confident that its proposal will move forward, as it has strong support from the United Steelworkers union.
German investor confidence remains muted – Germany, the economic powerhouse of Europe, continues to deal with a sluggish recovery from its recession this year. Investor confidence, as measured by the ZEW institute's gauge, showed a marginal improvement in August. But the index reflecting the current economic conditions registered a further decline. Analysts predict that given Germany's heavy reliance on exports, the nation might struggle to boost economic output levels by year-end – making the path to recovery more daunting and prolonged.
In this week's "mailbag" issue, we're highlighting a question from Kurt H...
What are your thoughts on the macro demographics that suggest we don't have enough qualified working age people right now and probably in the foreseeable future. Is unemployment always going be low in the US due to these demographics? – Kurt H.
Kevin's Response
Last week, I finally got the chance to visit a new donut shop folks had been raving about...
It had almost every donut flavor you could think of... from classics like cinnamon sugar and chocolate sprinkles to brown butter waffle and matcha strawberry. It also sold beverages and other treats – like the famous black-and-white cookie from Seinfeld. To say the least, I was excited to see it for myself.
I walked in after the morning rush. There were a few people seated and enjoying their donuts. But overall, the place wasn't too busy.
Even still, there was only one employee working the entire café.
Again, the donut shop wasn't overrun with customers at the time... But what if it had been?
What if other folks had the same idea I did and decided to come after the morning rush? What if there was some sort of donut catastrophe in the kitchen and a long line of customers at the register waiting to order? What if a customer happened to spill their coffee right in the middle of the store?
That's just too much for one employee to handle.
Unfortunately, this has become the norm for countless places of business in the U.S. Whether it be a donut shop, a deli, a boutique clothing store, or even just your local convenience store, the number of employees working has shrunk.
And it is all a result of a major shift taking place in the nation's labor force...
Over the past two decades, Baby Boomers and Gen X'ers have been aging out of the primary workforce (which is considered ages 25 to 54).
Then the pandemic hit, and things in the labor market got even worse. As we know, the pandemic sent unemployment to levels not seen since the 2008 financial crisis.
Many of the people who lost jobs during the pandemic didn't come back... For the most part, these folks were retirement-eligible professionals.
In my opinion, current macro demographics don't just "suggest" we have a dwindling workforce... they make it pretty obvious that we have a big problem in the labor market.
Let's look at a few charts to see what I mean. The chart below shows the growing population of 65-year-olds in the U.S. over the past several decades. It also shows the growth in employees aged 65 and older...
As you can see, over the past 13 years, about 22 million people turned 65 or older. For comparison, over the previous 50 years (from 1960 to 2010), 23 million people turned 65 or older.
Now look at that bracket's labor participation rate over the years...
The labor force participation rate plummeted in 2020 during the pandemic. In the three years since then, it has only been able to recover about half of those losses.
Now let's take a look at individuals aged 55 to 64...
From 2000 to 2020, this population grew by 21 million people. Now, recall back to our first image showing the population growth of 65-year-olds. The period between 2010 and 2020, which saw an addition of 18 million people, had such tremendous growth because folks had graduated from this age bracket to that one.
This means that based on natural aging, we can expect the population of those aged 65-plus during the 2020s to reach similar levels as we saw during the 2010s.
Now look at the labor participation rate for those aged 55 to 64...
While it appears that this age group has regained its pre-pandemic labor participation rate, the actual number of people and the number of those working have fallen. The population for those aged 55 to 64 is down to 41.5 million today from 2020 levels. And the number of those folks working is down to about 26.5 million.
Moving on to the majority of the workforce, let's look at those aged 25 to 54...
As we noted earlier, the several million Baby Boomers and Gen X'ers that stepped onto the working scene in the '70s, '80s, and '90s are gradually working their way out of the system.
The only issue is that the younger generations (aka the millennials and even some Gen Z'ers) simply aren't entering the workforce at the same levels.
Let's take a look at this group's labor participation rate...
Even though participation rates are still relatively strong, the amount of folks entering the workforce has remained extremely flat over the past two decades.
This group has only added 4.4 million people to the workforce since 2000. That's only 62.9% of the population growth in this segment.
The bottom line is that the unemployment rate only measures those looking for work that are currently unemployed. It does not account for the fact that people are leaving the workforce and simply not being replaced.
This is how we get a historically low unemployment rate.
Remember, government labor statistics are slow to account for real-time changes. They can be manipulated, and they don't consider the amount of people working multiple jobs.
The fact of the matter is that we are seeing a mass exodus in the labor market.
Since the 1970s, "high unemployment" has been characterized as anything around 7% to 10%. In fact, since 1975, the unemployment rate has peaked six times, reaching levels near or above 8% five times.
Today, we are likely to see less volatility in unemployment given the changing state of the labor market. That means, unemployment rates that hover around 5% to 7% could be considered the new "high unemployment," just as we saw pre-1970.
So, while unemployment could rise in the case of a recession, getting back to levels we saw in 2008 would be extremely difficult.
Thanks again for the question, Kurt H.
The mailbag was a bit quiet this past week. Remember, whether you're writing in about a past essay, asking us a question, or even responding to another reader's question... we want to hear from you! As always, send your questions and comments to new@stansberryresearch.com.
