Endurance and efficiency training are both required for success in the long runs. Endurance is built by running lots and lots of miles. Efficiency comes from intelligently adding speed and tempo workouts to the training, after building on the base miles. Failure to train for both endurance and efficiency usually leads to an unsatisfactory marathon experience.
Likewise, two very important factors in the growth of our economy are the size of the labor force and its productivity. The sheer volume of workers is to GDP as the volume of miles is to the marathon runner. Without workers, the economy won’t grow. Productivity improvements are like the efficiency generated through speed workouts.
Just like a runner can sometimes overcome deficiencies in one aspect of training by emphasizing the other, the economy can show signs of growth in spite of slow growth in one or the other component. Unfortunately, now both the labor force and productivity are waning and this situation portends economic trouble on the horizon.
1. Source: Bureau of Labor Statistics
Of the two factors, productivity growth has the tightest relationship to GDP1. Productivity hasn’t been this bad since the 1982 recession. Business spending on capital goods is a major contributor to productivity gains and right now, the domestic environment of high corporate taxes and government regulations is not favorable for business to invest in America.
Labor Force size is less closely tied to economic growth2, which is fortunate, because it isn’t easily changed. It is part of the demographics on which economic as well as political decisions are made. In the past 15 years there has been a steady decline in the percentage of our population in the workforce. Today’s labor participation rate is the lowest since 19773.
2. Source: Labor & Productivity from Bureau of Labor Statistics; GDP from Bureau of Economic Analysis (www.bea.gov)
Baby boomers are hitting retirement ages in droves; that’s a big part of the problem. Immigrants have often helped grow our labor force, but for the past decade, even immigration growth seems stalled4.
American workers are still amongst the world’s best and hardest working. We are now a world leader in cheap energy production. Consumer confidence continues to recover which should buoy the economy for a while.
But we also have one of the highest corporate tax rates in the world. Our immigration policy is dysfunctional at best. The number of discouraged workers, those not even trying to find work, is finally improving, but it is still 76% higher than it was when the economy peaked prior to the recession5.
Neither productivity nor labor force stalls are likely to stop this economic expansion, but together their declines become a more significant issue6. If neither factor improves, it will be tough to avoid an unsatisfactory outcome in the long run.
In the shadow of these overarching long run problems, people and businesses continue living and thriving. We continue to recommend balanced and diversified portfolios* tailored to individual needs.
As always, call or email with any questions or concerns.
*There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not eliminate market risk.
1 I calculated a 0.5 correlation coefficient between productivity growth and GDP growth, using four year rolling averages of the data available on the BLS web site.
2 Using the same process as with productivity, I calculated a 0.3 correlation between labor force growth and GDP growth.
3 Using annual averages of monthly participation rated provided by www.bls.com,
4 According to the Department of Homeland Security’s most recent 10 years of data, immigration ranged between 957,883 and 1,266,129 with the peak in 2006 and generally declining through 2013.
5 BLS data shows 563,000 discouraged workers in May 2015, versus 320,000 in October 2007, the month we consider the peak of the previous expansion.
6 I calculated a 0.62 correlation between the combination of labor and productivity growth rates to GDP growth rates.