EPOP, Inflation And Markets | Seeking Alpha

Stock Market Capital Gains Increase Due to a Bull Market


The classic formula is simple. Take population growth and add the change in productivity of the working part of the population and you get the growth rate of the economy in real terms. Inflation changes the nominal price of the elements. And the deformation of inflation can slow the pace of real growth because inflation affects behavior in unproductive ways.

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But, as my friend Philippa Dunne asks, what happens if the population doesn’t grow? Or, to add a nuance, what happens if the labor force lags the growth of the total population? oops. Then things get tricky. And they get worse when the population stops growing.

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Here’s a chart from the St. Louis Fed database showing the long-term history of the Employment Population Ratio (EPOP).

Employment-population ratio

(“Employment to Population Ratio”, FRED, St. Louis Fed, https://fred.stlouisfed.org/series/EMRATIO)

Now here’s the same series with a close-up from the past five years. We want to capture and focus on the Covid shock and its ongoing long Covid aftermath.

Employment-population ratio

(“Employment to Population Ratio”, FRED, St. Louis Fed, https://fred.stlouisfed.org/series/EMRATIO)

The simple conclusion is that we don’t have enough workers.

In the October 13e edition of their economic newsletter TLRWire, “Short version: We’re in trouble,” Philippa Dunne and Doug Henwood note that the slowdown in population growth is “remarkable.” Why? Because the growth is so low. In fact, they cite that this is the lowest growth rate since the actual population decline of the Spanish flu year 1918. They conclude that “every component of population growth contributes to the slowdown”. Of particular note is that “immigration, which started to decline in 2017 when official policies turned hostile, is approaching zero.”

So if we don’t have population growth, we would need a sharp acceleration in productivity in the upward direction to have a recovery in growth in real terms. Okay. The framework is simple, but how do you get productivity gains if job applicants’ education and training levels lag behind and a growing teacher shortage forces school systems to hire new teachers who may have less knowledge to contribute and have little or no previous education in education?

Add to this the recent estimates that long-term Covid disability continues to increase and that the proportion of long-term Covid disability (partially, temporarily or permanently) among working-age adults is now estimated to be over 4 million people (“New data shows that Covid will keep as many as 4 million people out of work for a long time,” new data shows that Covid is keeping as many as 4 million people out of work).

Take into account 4 million missing workers with disabilities and then add the unknown factor of the people who are their caretakers to that number. To make matters even harder, according to the Migration Policy Institute and the US Census Bureau, we have an estimated 2 million fewer immigrants, even though there are a lot of people who want to come to the United States and work here to do the work we do. need. have done.

It comes down to? The number of job openings outpaces the number of job seekers, and the result is wage inflation pressures that are driving the Federal Reserve to focus hard on fighting inflation. The Fed has only one tool it can use to curb inflation and that is to raise interest rates to slow the rate of economic growth (recession?). I have just described an economic maelstrom that rivals a hurricane.

As this commentary is being written, we continue to hold our large cash reserves in US Equity ETF portfolios; we put some money in the market and customers will see those trades. But remember that financial markets are discounting mechanisms. They look ahead. And the stock market sell-off (combined with the bond market sell-off) has made many stocks and bonds much cheaper. At some point, the markets will begin to smell the end of this painful adjustment mechanism. And markets will start to price in the recovery, even as the full force of the hurricane recession winds blow.

Our remaining large cash position could change at any time.

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Editor’s Note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.


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