Monday, April 25, 2016

How are men’s underwear sales similar to the flatbed trailer market?


In the 1970s, former Fed chairman Allan Greenspan developed the “Men’s Underwear Index” as an economic indicator.  The theory is that increases in men’s underwear sales signal an economic recovery.

The logic is that men will forgo replacing their haggard shorts during a tough economy, but when a recovery begins, new skivvies are one of the first purchases a guy makes.  This index only works for men’s underwear, because women are usually much more diligent in replacing older undergarments. 

This index was recently back in the news as a report was released showing men’s underwear sales peaked in 2006, followed by three straight years of decline, with a bottom (no pun intended) in 2009.  Since then, sales have risen (no pun intended) steadily each of the last six years and are about 16% higher than 2006.

While the Men’s Underwear Index is an interesting economic indicator, I do not find it very useful.  For one thing, it is not as predictable as it was in the ‘70s due to the proliferation of styles and types of men’s underwear.  The “tighty-whities” and plain boxers were much more generic in price and durability, providing more consistency to sales and replacement cycles and, thus, the index.  And though there is high correlation, it has to be tightly tied to the employment numbers, which are already reported on a monthly basis.  This also means it is a lagging (perhaps more like a sagging) indicator, which means it just confirms what has already taken place.  By looking at the current graph of men’s underwear sales, I can determine that a slow and steady economic recovery has taken place since 2009, with good employment growth.  Nothing really new here.

Flatbeds are the men’s underwear of the trailer industry.  For whatever reason, during tough economic times, flatbed fleets will do whatever is necessary to delay replacing worn out equipment.  They will repair old trailers over and over again until the trailer is unusable.  When the economy starts to improve, there is tremendous pent-up demand, and flatbed sales take off and stay healthy until the next economic slowdown.

Flatbeds are also the trailer type most representative of the total U.S. economy.  Flatbed freight includes a wide range of products including industrial, consumer, and consumer-related goods.  This makes flatbed trailer sales a ready-made economic index of the U.S. economy.  It uses the same logic as the Men’s Underwear Index, but it is much more inclusive and expansive.  For example, the cut back in energy exploration is hurting economic growth.  This factor is also reducing flatbed freight and, therefore, flatbed sales. 

In addition, flatbed trailer manufacturing is very representative of “heavy” manufacturing in the U.S.  Factors that impact industrial manufacturing will tend to impact flatbed manufactures more than those of other trailer segments.  So it can represent the state of current manufacturing, to a degree.

Flatbed sales would also tend to be a better economic indicator than men’s underwear, because the flatbed trailer market is more sensitive to economic changes, meaning the cycles are more pronounced and easier to identify.  The underwear data is reported later and is often stale. 

What is the Flatbed Market Saying Now?

Here is a chart of flatbed trailer build since 1995 and the previous two recessions (blue bars):

Source FTR
Two important things are evident:

-         The flatbed market is subject to strong business cycles, and this market started a strong descent more than a year before the previous two recessions.  The market peaked this time in April 2015.

-         Flatbed demand hits bottom at the very end of a recession.  This is very consistent with the replacement cycle described earlier.  At the first sign of economic recovery, flatbed fleets need to replace badly worn trailers.

Flatbed trailer demand started to drop in July, a couple months before manufacturing in general began to slow.  It has steadily declined, but has stabilized some the last two months.  This is an indicator that needs to be watched.  However, you might want to buy some new underwear now, just in case.
This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, March 21, 2016

Expect A Recession By Year End – So Says The Commercial Truck Market

Right into the Danger Zone
Highway to the Danger Zone
Right into the Danger Zone
                             Kenny Loggins

Economic recessions are incredibly hard to predict.  The next one, even more so, because the Great Recession was so impactful that some economic indicators and industry cycles have yet to return to a “normal” state.

This is important because forecasters use current conditions, combined with past conditions and trends, to predict the future.  If you do it any other way, you are either guessing or you are psychic.  Now I have been accused of being psychic, which is actually a good thing in this case.  It means your forecasts are accurate and people can’t figure out how you did it.

Regarding the upcoming recession (everyone can agree that recoveries don’t last forever), there is naturally a wide divergence of opinion.  That is because a wise man once wrote “Economic recessions are incredibly hard to predict”.  The forecasts regarding the next 12 months are:

There Definitely Will Be A Recession

Rogers Holdings Chairman Jim Rogers said in a recent interview there is a 100% probability there will be a recession before March 2017.  Rogers is a well-respected investment executive, so when he says 100% it gets your attention.  So it’s looking bleak in Mr. Rogers neighborhood.

There are many other economists predicting a recession.  They make solid, logical, arguments using the standard charts and graphs.  They explain that the yield curve is not yet inverted (a recession predictor) but they can explain why it really is, or should be.

There Definitely Won’t Be A Recession

You can read commentaries and analyses from other respected economists proclaiming the economy is fine, is expected to get better, and there is no recession in sight.  They also use the standard charts and graphs to buttress their forecasts.  And after all, the yield curve is not inverted.

ECRI (Economic Cycle Research Institute), whose specialty is forecasting recessions, is not predicting one yet, even though its leading index is steadily declining.  The institute is probably being cautious after forecasting a recession in 2012, which never happened.  FTR is forecasting continued weak economic growth, but no recession.

Using The Commercial Vehicle Equipment Market To Calculate The Next Recession

Reading all the commentaries and analyses is confusing, so what can the commercial equipment market tell us about our economic future?  Well, our industry is a leading indicator for the economy.  I determined this years ago when my bosses assigned me the difficult task of finding the leading indicator for the commercial vehicle market.  After month of study I determined there was nothing in front of us, therefore we’re the lead car on this train.

My theory was confirmed soon after that when I attended a presentation by a General Motors economist and she said they track commercial vehicle sales closely because it is a leading indicator for the general economy.  This is not a new phenomenon.  The Dow Theory, developed in the 1930’s, states that the Dow Jones Transportation average is a key barometer to the future condition of the economy and the stock market. 

How It Works

We are going to construct a simple model based on North American Class 8 truck demand. We will take the peak month in the last two upcycles and then measure how long it took after that peak for the general economy to enter recession.

I know this model is so simple that a fifth-grader can understand it, but I like simple models and it does have logic behind it. Truck demand is very cyclical and the economy is also.  Therefore if truck demand is a leading indicator, it should always hit a peak before the general economy.  It also makes sense that trucks haul goods and if you need fewer trucks now, then you are hauling fewer goods in the future and economic growth should slow.

The Model

1. Peak Class 8 Production = October 1999
Recession Begins = March 2001
Gap = 17 months

2. Peak Class 8 Production = October 2006
Recession Begins = December 2007
Gap = 14 months

This time:
Peak Production = June 2015
Expected Start of Next Recession = August 2016 to November 2016


Because the current truck demand cycle is very similar to 1999-2000 (so far), let’s say the model is predicting a recession beginning in Q4 this year.  Hang on, we are about to go right into the Danger Zone.

Monday, March 7, 2016

Officially (by me) a Manufacturing Recession

The term “manufacturing recession” started appearing more frequently in economic articles and discussions beginning last October.  It is an odd expression from an economist’s standpoint.  If the entire economy were in recession, then it would just be a recession.  Consequently, for just a manufacturing recession to exist, the non-manufacturing segment of the economy would have to be growing enough to offset the manufacturing slump and result in a positive GDP number.

This is entirely possible because manufacturing now makes up only around 12% of economic output, while consumer goods and services are 70%.  However, manufacturing recessions are still rare since most of the time the manufacturing and the consumer sector of the economy move somewhat in sync. You would also not expect a manufacturing recession to last an extended time period.  Either the consumer sector would weaken, resulting in a standard recession, or manufacturing would recover and “rejoin” with the rest of the economy.

In addition, manufacturing recessions would tend to be mild.  Any significant downturn in manufacturing would probably lead the economy into a recession and, while the consumer sector and manufacturing can move in opposite directions, the gap between them will not be wide for very long.  Therefore, “manufacturing recessions” should be short and mild.

The term caused a vigorous debate in our recent FTR internal economics meeting.  Somebody asked if the economy was in a manufacturing recession, and we had problems answering that question.  It was pointed out that a manufacturing recession is more severe than a slowing in manufacturing growth.  We all agreed the manufacturing sector had been slowing for several months.  We also agreed that we would not use the term “manufacturing recession” because we could not define the term.

That worked fine for a few minutes, until someone used the term again and the debate started all over again.  I then offered a definition for “manufacturing recession” which I will share with everyone here.

Manufacturing Recession Defined

A manufacturing recession occurs when the PMI Manufacturing Index (Institute for Supply Management) is below 50 for six consecutive months, and during a time that GDP is not negative for two consecutive quarters (the standard definition for an economic recession).

The manufacturing PMI is one of the most accepted measurements of manufacturing activity.  Readings above 50 indicate expansion and those below, contraction.  The index is reported monthly and thus very easy to track.  The reason for the six-month time period is that it corresponds to two quarters of GDP, the recession yardstick.

Where Are We?

Here are the PMI readings for the last six months: 

September = 50.0 (equal to no growth)
October =     49.4
November = 48.4
December = 48.0
January =      48.2
February =    49.5

Therefore, by my strict definition, a manufacturing recession will be declared if the manufacturing PMI is below 50 in March.  But because there has been no manufacturing growth since August, I am going to invoke the “horseshoes and hand grenade rule” and say, yes, we are in a manufacturing recession. And
kudos to the people proclaiming in October and November 2015 that a manufacturing recession had begun; they turned out to be correct!

What about GDP?

For a manufacturing recession to occur, GDP cannot be negative for two consecutive quarters.  This would happen when non-manufacturing is growing and manufacturing is moderately declining, and we would expect GDP to be positive, but weak.  The current 2015Q4 estimate of 1.0% clearly fits the criteria.  The WSJ Economic Panel is forecasting 2.0% for Q2.  Based on the current manufacturing data, the Q2 estimate would appear to be a bit too high.

However, based on this Q2 GDP forecast, the PMI rising two straight months, and the February number at 49.5, it appears that manufacturing will begin growing again in March, and the “manufacturing recession” will end.  The FTR freight forecasts do not show manufacturing getting much better for the rest of 2016, however.  Truck freight growth is forecast to grow an anemic 1.3% this year.  

If manufacturing is able to contribute, even moderately, to GDP, it would indicate that we can make it through 2016 without a recession.  However, the economy will not have much momentum entering 2017, as this long, slow, extended recovery will eventually have to run out of steam.  


 This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Tuesday, February 9, 2016

Controlling the Greased Pig

Many important economic indicators are showing an obvious negative trend.  If you would have seen this trend in the past (before the Great Recession) you would have concluded a recession was imminent, and most times, you would have been correct.  Our current conditions point to recession under normal circumstances, but conditions are still far from normal.

For most of this recovery manufacturing has led the way, while services and housing have lagged.  Currently, some analysts are saying we are in a “manufacturing recession” but, at the same time, the service sector and housing are performing much better.  It should be noted that if we are in a manufacturing recession, it is currently a very mild one, with the ISM (purchasing managers) index just under the magic “50” neutrality number.

My index that tracks discretionary spending continues to show solid growth, no doubt helped by the “low gas price” dividend.  The Restaurant Performance Index shows that people are continuing to spend some of this “bonus” for dining out. So, even though certain sectors of the economy are on a downward slope, the economy is expected to continue to cycle within a restricted range. 

I believe this is how this restricted range works:

The economy was overheated and running wild in the run up to the Great Recession, then it spun out of control and started to do significant damage.  The government tried to grab hold of it, but it was like trying to catch a greased pig.  With all the turmoil and calamity, maybe it was more like trying to grab a slick wild boar.

The government was finally able to stop the damage by exerting extreme force over the economy, controlling interest rates, manipulating the money supply, huge bailouts, and, to some extent, regulating the entire financial system.  They then put the pig in a pen.  The pig can move around but is limited by the barriers surrounding it.  The pig never moves to the top or bottom of the pen very forcefully because of the limitations.  When the pig runs into to the top or bottom wall, it instinctively moves back to the middle of the pen.

They scrubbed the grease off the pig, they wrote new rules for the pig, and they nurtured and lectured the pig on proper behavior.  They basically have subjected the pig to the equivalent of helicopter parenting.  You could remove the pen and let the pig run free; however, you don’t know what would happen.  Would you get a nice, clean pig which exhibits proper behavior after years in the pen, or would the wild boar reemerge and start wreaking havoc like before?

This was a topic for debate in the last election.  One argument was to give the pig more freedom and incentive, the other argument was to keep him in the pen.  The pen strategy prevailed. You do tend to want to keep the pig contained, if you doubt your ability to manage it after it’s loose.

The good news is that the pig is prevented from going too far south; the bad news is that it is limited in traveling north.  So we sit in this cycle where the pig moves around, but never really goes too far in either direction.

Therefore, it appears that the economy is just experiencing one of its muffled down cycles.  We have this anemic 0.7% GDP growth for 2015Q4, but the Wall Street Journal Economists Panel is forecasting 2.4% in Q1, and 2.5% growth in 2016 (FTR is at 2.2%).  So, ho hum, nothing to see here, please move along.

A check of the Economic Cycle Research Institute (ECRI) Weekly Leading Index Growth Rate confirms this.  This indicator had been a very reliable predictor of recessions in the past.  This index did take a dip in January, just as it did in 2011, 2012, and 2014…and ECRI is not warning of a recession in 2016.

Of course, world economic turmoil could change this.  It would, however, be the equivalent of removing the south end of the pig pen.  Our government would then be challenged with recapturing the pig and would no doubt return it to the pen; because “you see what can happens if the pig is allowed to run free”.

Unfortunately, one of these times when the economy cycles down, it will not stop, but keep declining into a recession.  When that happens people will look at all the charts that were going negative beforehand and exclaim, “How could you have missed that? It was so obvious!” Yes, just as obvious as the numerous times during this recovery when the economy cycled down and then cycled right back up.

Recessions are very difficult to predict under normal conditions, the next one will be even more difficult to forecast.  We may not even find out about the next recession until after it has already ended.  I can confidently say we will not have a recession – until, of course, we do.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)



Monday, January 11, 2016

A Bumpy Landing for Class 8 Trucks


Class 8 truck orders for Q4 are down 46% versus last year.  The market that looked so strong just a few months ago, has taken a pronounced downturn recently.  Production rates are falling and OEMs are laying off thousands of workers.  What is happening, and why is it happening now?

Industry and financial experts started calling as soon as the signs of trouble started appearing last October.  I reminded people that FTR had been forecasting a Q4 downturn since the beginning of 2015, and now it was indeed happening.  The forecast was built on our Economically Derived Demand model which is designed to predict Class 8 cycles.  I also reiterated that the forecast called for a “soft landing” in 2016.

Not So Soft

My favorite phrase in 2015 was “soft landing.”  I probably said the phrase over 100 times to thousands of people, if you count presentations, reports, webinars, and articles.  “Soft landing” perfectly described what was expected in 2016 and in addition, people liked to hear the phrase because they were fearful of a market crash like 2007-2009.  A relatively mild 13% decrease (for the year after peak) in Class 8 truck build had been forecast for 2016.

Now it appears the landing will not be so soft.  The latest FTR forecast is for a

19% decrease for 2016, with the market at times operating at a rate more than 20% down from just a short time ago.  A bumpy landing, but not a crash as of yet.

Overheating

A major cause of typical Class 8 industry cycles is OEMs overbuilding in the upturn and then having too much inventory, which results in a deeper downturn.  The financial community was very concerned about this happening in 2015.  The OEMs had assured financial analysts that it would be different this time.  When the financial people asked me about it, I said an overbuild was a possibility but shouldn’t be a big issue because we were expecting something called a “soft landing.”

But the market did overheat and now OEMs are sitting on record inventories, which are causing them to slash production rates and lay off workers.  We’ve all seen this movie before, and this is the part that is painful to watch.  If the OEMs were trying to manage demand better this time, what went wrong?

Warning Signs

There was a troubling disconnect early in 2015.  In Q1, retail sales were 12% lower that production.  Although fleets were willing to place humongous orders in 2014Q4, they were not in a hurry to take delivery 4 to 6 months later.  Of course inventories shot up, but that was not thought to be a problem because the market was considered smoking hot (due to high orders and increased production) and trucks were expected to start flying off the dealer lots very soon.

But that never happened.  Retail sales exceeded production in only four months in 2015, and the total net difference for three of those months was a paltry 1,600 trucks.  Under normal conditions, inventories should have peaked in Q2 and then started a linear decline.  Instead, inventories kept right on climbing, peaking in October and falling a paltry 300 units in November.

It would appear fleets overestimated the amount of trucks they would need in the second half of the year.  This “over optimism” spilled over to the dealers, who stocked up in anticipation of increased sales throughout 2015. 

The huge order volumes in 2014Q4 were also driven by concerns of limited production capacity which caused fleets to issue “place holder” orders to secure future build slots in case they were needed.  Many of these orders were cancelled in 2015Q4.  It also appears fleets were more careful in bringing equipment into service after the Great Recession.  They placed big orders and brought the trucks into service more gradually, as needed, then stopped adding equipment when prudent.  All this adds up to another overbuild and record inventories.

Who Gets The Blame?

I don’t think you can blame anyone for the predicament this time.  The OEMs received massive orders and responded.  The fleets saw a strong freight market and the growing need for new equipment for the first time in several years, and displayed strong confidence in the market.  The dealers saw an opportunity for increased sales and thus responded accordingly. 

This is a very cyclical industry, in a free-market economy, driven by forces mostly outside its control, operating in a strong competitive environment. The OEMs competed strongly for all this new business, and this competition is key. It’s similar to being in a race that you are running hard to win, but you do not know where the finish line is.  Under these conditions, you are going to run too far every time.

Other Factors in Play

Unfortunately, this decrease in Class 8 cycle demand comes at a time when the manufacturing sector of the economy is faltering.  The ISM (purchasing managers) Index has been below 50 (indicates contraction) for two months, exports are weak, the energy industry is reeling, and business inventories are bloated.  Some economists are even claiming that we are in a manufacturing recession.  Of course this industrial weakness is pushing truck build down even more than expected.  Without these negative economic factors, maybe the “soft landing” scenario would have played out.

Bumps in the Road

Right now we are nervous because of the production cuts, layoffs, and declining orders.  However, December preliminary orders were almost 28,000, not too shabby in an average year.  Backlogs are still relatively healthy, but high inventories will remain a hindrance to future growth.  Once the smoke clears, the market should find the proper balance, and the runway should smooth out.  We will keep on rolling, just at a slower speed.

What About the Economy?

A drop in commercial equipment demand often precedes a decrease in GDP.  Trucks carry the bulk of freight in the U.S. so less trucks and trailers needed, means less economic growth.

The larger than expected decline in Class 8 truck demand may indicate weaker growth for 2016 compared to 2015.  However, the GDP will be better in Q1 than the previous two years, if this season’s mild winter continues.    
This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)






Thursday, December 10, 2015

The Commercial Vehicle Market Cycles Down – Will the Economy Follow?

This economic recovery has most assuredly been slow and steady. Just look at GDP growth for the last 5 years:

2010 = 2.5%
2011 = 1.6%
2012 = 2.3%
2013 = 2.2%
2014 = 2.4%
2015 = 2.5%

Only 90 basis points of spread over a six-year period.  Of course there are fluctuations, but economic growth has exceeded 3% very few months during this time.  A free market is supposed to generate a business cycle, however the business cycle has been muted coming out of the Great Recession. Possible explanations for this include:

-         Recessions that damage the financial system, as the Great Recession did, take longer to recover from, and economic growth is restricted for an extended period of time.

-         The recession was so severe, businesses and consumers were very cautious in spending and investing. This lack of capital flowing into the economy has slowed growth.

-         The Great Recession made businesses risk averse.  Companies did not take chances that had the potential to generate big rewards; the type of gains that fuel GDP growth.

-         Interest rates have been held constant at an unnatural, 0%, rate.  In a free market economy, the cost of money should never be zero.

-         Quantitative easing – the government attempts to manage the economy, and thus dampens the natural cycle.

-         Government policies which limit economic growth.  The current administration greatly favors regulation over free market policies.  This flattens the cycles and restrains GDP.

However, despite all the complaints about a weak, sluggish recovery, the past six years have been very good for manufacturing. The slow, steady growth has provided companies with a more stable, predictable environment.  This enables producers to plan and schedule better, and to operate at peak efficiencies.  As long as sales are increasing, even moderately, costs get reduced due to the efficiencies and profits rise.

That is why corporate profits at manufacturing firms have been so healthy the last few years.  However, the combination of slow growth and risk aversion means companies try to maximize already existing resources.  This results in fewer new factories, new hires, and equipment purchases.  This, in turn,
impacts GDP and new job creation.  Corporations have been criticized for “sitting on profits,” but this behavior is highly rational under the current environment.  There is limited benefit to reinvestment, and the perceived risk still remains.

The Class 8 truck and heavy-duty trailer is known for its large business cycles.  This market is tremendous in good economic times, and horrible during recessions.  It would be expected that the stable GDP numbers would have smoothed out the industry cycle some this time.


Very interestingly, it appears this is not the case.  The commercial equipment market has continued to cycle up despite extended moderate economic growth.  The industry has been impacted by the slow recovery.  The sales gains in the early years of the recovery were modest, and this did extend the cycle.  For example, commercial trailers are experiencing their record sixth consecutive year of growth (5 years was the previous record).  However, the commercial vehicle industry has cycled very high, as it normally does, despite all the factors discussed previously.

The Class 8 market has been extremely hot, but has now begun to cool off.  Backlogs peaked in February, and builds peaked in May.  Orders over the last six months are down 35% year-over-year.  It was expected that the market would gradually decline into a “soft landing” and not collapse as in previous down cycles.  Because, of course, the economy is still growing, so the cycle should moderate, right?

However, preliminary Class 8 truck orders were alarmingly low for November, indicating that production is going to drop faster than anticipated, especially with inventories at record levels.  The normal down cycle may be in play despite a moderately growing economy.

Another consideration is that down cycles in the commercial vehicle markets often precede weakness in the general economy.  The good news is that the trailer market, while peaking, has not begun its down cycle quite yet.  Many economists believe that because the economy is not cycling up rapidly, the next recession, due sometime in the coming years, will not be that severe.  But let’s see how fast and how far the commercial vehicle market falls for clues on the general economy.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)




Wednesday, November 11, 2015

What We Have Here is a Failure to Participate

Last time I discussed why the “low” unemployment rate was no longer a reliable indicator of the labor situation in the U.S. Now, as the latest headlines trumpet, the official unemployment rate is dropping to 5%, wow 5%! What is currently wrong with the job market?

-         Not enough jobs are being created to absorb the number of people who want to work.

-         The jobs being created are not “quality” jobs. The wages and benefits are not equal to many of the jobs destroyed by the Great Recession.

-         There is a large, and growing, structural unemployment problem. The skills of the unemployed and underemployed are not a match for the “quality” jobs that are being created.

-         The labor participation rate fell rapidly as a result of the recession and has continued to decrease. Many people have left the workforce and are not currently seeking employment.

Because the labor participation rate directly impacts the unemployment rate and is the most important factor in this right now, it deserves closer examination. A problem with understanding the labor participation rate is that it has become highly politicized. Conservatives claim that all the people are leaving the workforce due to the horrible economy (or discouraged workers). Liberals claim all the people are leaving the workforce because all the baby boomers are hitting retirement age ( or demographics).

An economist at the recent FTR Freight Conference gave the most objective analysis I have heard. He said calculations show that two-thirds of the labor participation loss was due to demographics and one-third was due to discouraged workers.

The first thing to consider is this: even if only one-third of the increase is discouraged workers, it is still a significant number. At some point in a recovery, workers are supposed to reenter the job market as opportunities increase. This is not happening.

The second thing is: I would contend that the two-thirds due to demographics figure is probably overstated. Within the baby boomers, it is not just age that is a factor. During previous recessions, younger workers were laid off in greater number than older workers. The reasons were: seniority rules for union workers; employers not having to cut that deeply due to a less severe recession; and employers being loyal to workers who had worked many years at their companies.

The Great Recession changed all that. Many more of the older workers lost their jobs this time for the following reasons: the work force had become much more white-collar since the last bad recession, so older workers were not protected by seniority rules; the recession was so severe that many companies cut employees based on salary levels; older, more experienced workers had higher salaries, therefore they were cut in greater numbers; and, finally, the loyalty rules have changed in our culture. For years, businesses lamented the decrease in employee loyalty, and during the Great Recession the corporations stuck back.

After getting downsized, a significant number of older workers lacked skills, opportunities, or the desire to start over in a new job, so they have involuntarily retired, found a way to go on disability, or have just dropped out of the workforce and given up hope. These people get counted as “demographic,” but they are very discouraged and trapped by their circumstances.

Also, factor in the people who are working part-time beyond their retirement age because they are either bored or didn’t save enough for retirement. These people are increasing the participation rate not decreasing it, and doing so in the older age ranges. So what we have here is the 70-year old greeter at Walmart who is just relieving his boredom, offsetting the 60-year old person who needs to work but has given up hope. On paper it looks the same, one person doing one job, but the circumstances and consequences are extremely different.

In addition to these “older worker” and “demographic” factors, here are some other reasons for the lower labor participation rate:
This guy would like greater participation!

-         The Affordable Care Act enables more people to receive health insurance without having a job. This provides a disincentive to work that did not exist before.

-         The expansion of the safety net (food stamps, etc.) during the recession also provides a disincentive to work for some people.

-         There is a cultural change taking place reducing the traditional “work ethic” which was stronger in previous generations.

-         Skilled manual labor is not desired or valued by people or society as in times past. For example, trailer manufactures have had problems finding people who wanted to work in factory jobs the past two years.

-         The “quality” of jobs created in this recovery has been poor compared to the quality of the jobs destroyed in the Great Recession. There may not be sufficient motivation for someone who was displaced from a $50,000 white collar job or $40,000 blue collar job to take a retail or service position that pays half as much.

-         The significant “structural unemployment,” unemployed people not having the skills necessary to fill the job openings. This happens at the far ends of the age ranges. Older workers cast out from their long time jobs may lack the technical skills needed for new jobs. Younger workers have amassed huge college loan debt and do not have the skills (or desire) for the skilled manufacturing jobs that are available.

Add this all up, and you have a tremendously dysfunctional employment situation. The labor participation rate is alarmingly low. Economic growth is stuck on “low,” due to the lingering effects of the recession (both psychological and monetary) and government policies that restrict growth, not promote it. When explored in total context, is it any wonder the unemployment rate does not accurately describe the current situation?