3 Stories in the global economy that should not go un-noticed
Markets pulled back last week as investors reacted to several disappointing economic reports and expressed concern that a spring swoon is around the corner. The big news was Friday’s job report, which showed a drop in the overall unemployment rate from 7.7% in February to 7.6% in March. However, much of the drop can be attributed to discouraged job seekers who stopped looking for work rather than organic job creation.
For the week, the S&P 500 lost 1.0%, the Dow trimmed 0.1%, and the Nasdaq fell 1.9%.
It is the job report that influenced the selection of our 3 stories this week that rose above the noise:
Vanishing Workforce Weighs on Growth
One particularly concerning element of last week’s disappointing jobs report was a large decline in the labor force participation rate, which fell to its lowest level since May 1979. Although a trend of declining participation has been in place for over a decade, the recession accelerated the trend and there has been hope that workers would come back into the workforce as the economy recovered.
An article from The Washington Post provides a nice overview of some of the implications of the decline in the participation rate, most notably a population with eroding skills and a decline in long- term potential GDP growth. Not mentioned, but important for its investment implications, is the potential for future wage inflation as the number of qualified workers in the workforce shrinks.
Unions, Inc.
The Economist published a story that looks at the state of organized labor in the world. In 2012, American union membership was at a 96-year low. Similar trends are also taking place in much of the developed world, where union membership has been prevalent. As globalization has made shifting jobs to the lowest-cost option easier, unions have suffered because their bargaining power has declined.
Younger workers are also seeing less value in joining unions, with many workers in the U.S. opting not to join when given an option. While the overall trend for union membership is declining, some unions have adapted to the changing environment, and made themselves more flexible to company demands while still providing value to their membership. This article provides a look into some of the changes occurring, and gives an idea of what labor unions may look like in the future.
Austerity Bites?
Weak job growth in March may have been a delayed reaction to the tax increases that were part of the fiscal cliff deal, according to The Economist’s Free Exchange blog. Job growth remained relatively strong in January and February, despite the expiration of the payroll tax and marginal tax increase for high-income earners. However, the U.S. economy added only 88,000 jobs and retail employment dropped by 24,000 in March, elevating concern that a slowdown in consumer spending may be around the corner.
Any slowdown in economic activity resulting from the fiscal cliff and budget sequestration may only be temporary. As the article points out, “and to some extent, this report simply drags expectations back to where they were early in the year, when it was anticipated that fiscal policy would meaningfully slow growth in the first half of the year but allow for an improvement later on.”
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
