Monday, December 30, 2019

Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?

by Calculated Risk on 12/30/2019 04:50:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2020. I'm adding some thoughts, and maybe some predictions for each question.

4) Participation Rate: In November 2020, the overall participation rate was at 63.2%, up slightly year-over-year from 62.9% in November 2019.   The BLS is projecting the overall participation rate will decline to 61.2% by 2028.  Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?

The overall labor force participation rate is the percentage of the working age population (16 + years old) in the labor force.   A large portion of the decline in the participation rate since 2000 is due to demographics and long term trends.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The Labor Force Participation Rate in November 2019 was at 63.2%, up from the cycle low of 62.4% in September 2015.

Some analysts were expecting the overall participation rate to recover to pre-recession levels (over 66%) but that analysis ignored demographics and long term trends.

Note: Due to demographics, I also follow the prime working age participation and employment population ratio.

In September, the BLS released their updated Labor Force projections through 2028. Their projections show the overall Labor Force Participation Rate (LFPR) declining to 61.2% in 2018 from the current level.  Although it is uncertain when the decline in the overall LFPR will begin, demographics suggest the LFPR will decline about 2 percentage points over the next decade.

It is possible that the participation rate will increase for other groups like prime working age women, but that is unclear - and those possible trend changes will probably be overwhelmed by the larger demographic trend.

Participation Rate Prime and OlderThis graph shows the average participation rate for prime working age cohort by five year groups (25 to 54 years old), and the next four older cohorts.

Note that the median person in the Boomer generation will be 66 in 2020, and that the youngest person will be in the 55 to 59 cohort - when the participation rate starts to decline.

Note: The participation rate for older age groups has been increasing over the last couple of decades, but that is far less significant than the number of people moving into the next age group.

All of the Baby Boom generation is now in age groups with significantly declining participation rates, and I expect this will start a downward trend for the overall participation rate over the next decade, even with a healthy job market.

So I expect the overall participation rate to decline in 2020 to just under 63% by the end of the year.

Here are the Ten Economic Questions for 2020 and a few predictions:

Question #1 for 2020: How much will the economy grow in 2020?
Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?
Question #3 for 2020: What will the unemployment rate be in December 2020?
Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?
Question #5 for 2020: How much will wages increase in 2020?
Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?
Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?
Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?
Question #9 for 2020: What will happen with house prices in 2020?
Question #10 for 2020: Will housing inventory increase or decrease in 2020?