Last Friday, Professor Jeremy Siegel and I sat down with Sam Chandan, founder and chief economist at Chandan Economics, to discuss the unexpectedly weak jobs report, productivity, low interest rates and implications for the housing market.
March’s Disappointing Payrolls Report
This was the first disappointing report in months. The jobs numbers missed by more than 100,000 jobs, and estimates for the prior two months were revised downward quite significantly. Accordingly, the Federal Funds futures market pushed back expectations for a rate hike beyond September.
Chandan says that even among the less optimistic economists who had modest forecasts, the numbers missed those expectations significantly. That said, he doesn’t think investors should read too much into a single weak report as we have had 12 months of strong employment reports otherwise. In his opinion, this may be a temporary lull, perhaps due to especially bad weather. Additionally, countering this weak report, first-time unemployment claims looked pretty strong, and the unemployment rate kept steady at 5.5%.
Weak Productivity: Is It Really Just a Measurement Problem?
One of the big economic puzzles this year has been disappointing productivity figures. One theory is that this is because the fastest growth in employment levels has come from 16- to 19-year-olds, who clearly have less to add to employers and may drag down productivity. But Professor Siegel thinks it’s something else. He wonders whether we’re even correctly measuring economic output.
There has been great innovation allowing us to do for free many things that we previously paid for and counted in economic output. New technology such as point-and-shoot cameras being substituted by iPhones, free Google Maps instead of purchased Garmin navigation devices and books substituted by Kindles are counted as “other factors.” The economy is rapidly changing, and Siegel believes there may be a measurement problem.
Depressed Participation Rates
The labor participation rate is at a 32-year low and has experienced a big drop that started before the financial crisis began and has only accelerated since, Siegel says. Additionally, he cited a J.P. Morgan research piece that indicated that since the crisis began, about half of this drop in productivity is attributable to demographic factors, including the retirement of baby boomers. The other half is unexplained, suggesting a secular decline in the participation rate.
Chandan believes that baby boomers’ retirement will bring down participation rates. The flip side is that demographics and population are driving the increased demand in different property types, in particular an increased demand for and mainstreaming of senior housing as a separate investment class.