The basic thesis following Friday's better than expected January payroll report
is that an improving jobs picture will translate into higher tax revenues for the
Federal government, reducing future deficits and the overall level of debt.
However, overlooked by most market pundits is the clear drop in the Labor Force
Participation Rate (LFPR). A 1.2 million drop in the labor force was the primary
driver for the fall in the unemployment rate to 8.3% from 8.5%. This is hardly
good news since the U.S. clearly needs an expanding labor force AND lower unemployment
if deficits and overall debt is to contract. A closer look will reveal that
the USD strength the initially followed Friday's release is misplaced, and the ongoing
decline in the LFPR makes U.S. deficits and debt a much larger burden to overcome.
Why the LFPR Matters
A rising LFPR rate increases the number of potential wage earners, raising the potential
tax revenues for Federal, State, and Local governments. Forecasts for
LFPR therefore play a key role in budgetary projections. With January's
1.2 million drop in the labor force, it is clear that future forecasts of potential
tax revenue, assuming a rebound in hiring, will continue their decade long
trend of being ratched lower. This occurs anytime the LFPR moves lower.
For the U.S., the fact is that the LFPR has been in steady decline since January
2000, falling from just over 67%, to a multi-decade low of just under 64%.
The following chart, courtesy of Zero Hedge, shows this disturbing trend clearly:
January's Jump in Labor Force Drop Outs Largest EVER
What is notable about the latest drop in the LFPR is that it is the largest fall
in Labor Force ever. Whether this means that the long known rise in the long-term
unemployed is being followed by these individuals just giving up entirely is certainly
the main question. What this means for future deficits and debt is also very
clear; basically the U.S.'s budgetary woes will be more difficult to overcome as
the Labor Force Participation Rate fall stunts the growth of the U.S. Labor
The following chart, courtesy of Zero Hedge, shows the anomalous January jump:
Decline in LFPR is NOT USD POSITIVE
The ongoing fall in the LFPR decreases the potential tax revenues available to fund
the U.S.'s large ongoing deficits and overall debt. If the fall in the LFPR
continues at the current rate, already dismal deficit and debt forecasts will need
to be adjusted higher to accommodate that fall-off. While it is easy to focus
on headline Non-farm Payroll numbers like the 243,000 jobs created in January, and
the headline fall in the unemployment rate to 8.3% from 8.5%, the change in the
LFPR is equally significant.
The USD strength in the wake of Friday's payroll report makes sense, if one doesn't
factor in the sharp drop in the LFPR. However, the ongoing drop in the LFPR
makes future deficits a problem, and ultimately will hinder U.S. efforts to ever
get on top of its $15 trillion plus debt load - and growing.
Before popping the champagne celebrating a turn in the U.S. jobs picture, understanding
what is driving the fall in the unemployment rate is sobering, to say the least,
and should, in the long run be extremely USD negative. Insofar as the negative
correlation between the USD and gold and silver persists going forward, the drop
in the LFPR is ultimately positive for precious metals.
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