Market Economics | Interest Rate Strategy - BNP PARIBAS ...

For example, over the past six months, the
participation rate has dropped 0.4pp. The group
registering the largest decline in participation over
this period is prime-age males aged 35-44 whose
participation rate declined 0.7pp to 90.9%. While this
group still has the highest rate of participation overall,
it has declined from 92.1% at the start of the cycle,
raising questions about what these men are doing.
Perhaps they are going back unto education in order
to acquire a different skill set. They may be taking
time off to raise young children.
This recession has hit men harder than women in
general, owing to the fact that job losses have been
concentrated in male-dominated industries such as
construction and manufacturing. It may be that it
makes economic sense for some households for the
father to stay home instead of the mother. Leaving
the labour force is a significant economic decision for
prime-age workers and these choices may be slow to
reverse.
We assume that payroll gains will accelerate from
100k at the start of the year to 200k by the end of
2011. If the workers returning to the labour force
offset the baby boomers leaving and the participation
rate is unchanged, the unemployment rate will drop
to 9.1%. Should the participation rate register a more
robust cyclical rebound of 0.4pp, the unemployment
rate would rise to 9.7%.
If people leave the labour force on a permanent or
semi-permanent basis, they will not be queuing for
jobs and putting downward pressure on wages.
Therefore a decline in the unemployment rate driven
by labour force participation instead of strong job
growth could be a legitimate sign of improvement in
labour market conditions as far as the Fed is
concerned.
Consider the following: if we get our forecast for Q4
GDP growth of 2.6% q/q saar, we will end up with
growth for 2010 of 2.6% q4/q4. The unemployment
rate dropped from 10.0% in Q4 2009 to 9.7% in Q4
2010 on job growth of only 94k per month.
Taken at face value, this would suggest that 2.6% is
enough above the economy’s potential rate of growth
to reduce labour market slack. The fact that each
paycheck has to support a larger number of people is
consistent with a more subdued potential growth rate
in consumer spending, and the persistence of higher
saving rates, than in recent decades.
Ultimately, we still expect some cyclical rebound in
the labour force participation rate and that the
unemployment rate will end the year at 9.3%.
Overall, the December employment report is
consistent with economic growth remaining in
moderate territory, but highlights that the US
economy continues to face a number of headwinds.
Julia Coronado 13 January 2011
Market Mover
6
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