One of the indications that something may be amiss in the U.S. economy shows up as a dip in its labor force participation rate. GuruFocus noted that in its “Economic Data” (http://www.gurufocus.com/economic_indicators/13/civilian-employment-percentage-of-population) when it showed that there has been a drop in the employment participation ratio since 2000. As a consequence there was a gap between what was the historical trend of employees supporting the GNP and people who are not working.
Warren Buffett pointed out that there is a relationship between the total market cap of the U.S. stock market and the U.S. GNP. Buffett said the growth in the GNP is “…probably the best single measure of where market valuations will stand at any given moment” (http://www.gurufocus.com/stock-market-valuations.php). Investors must therefore pay attention to the ratio of the total workforce participation rate as a % of the total population whenever a deviating from past trends is taking place.
We have examined the most recent trends in the U.S. population (http://data.bls.gov/cgi-bin/surveymost) of 320.6 million people. We have also counted the Civilian Work Force of 157 million personnel, which includes everyone over the age of 16.
From an examination of the ratio of the workforce to the total population we have found that there are 9.9 million workers (or 6% of the labor force) not participating in the labor force as compared with levels recorded in the prior peak of employment in 2007. However, personnel not reported in government statistics, such as some illegal aliens, were not counted in the workforce participation rate. The 8.9 million unemployed (or 5.5% of the workforce) are counted by the Bureau of Labor Statistics as a part of the labor force and therefore not "missing".
The U.S. economy is now limping with a total of 11.5% of its working capacity tied up in ways that are not contributing to the GNP. Whether that is sustainable, with a population now living longer, is an issue that will have to be considered when making long-range investment decisions.
Our conclusion is that such a large non-working population must somehow consume income from non-payroll sources. Whenever that involves government subsidies, transfer payments or benefits of any kind that will generate an increase in debt or other liabilities, which become ultimately a drag on the growth of the economy.
Meanwhile, Buffett is right when he says that ultimately it will be the earning power of our workforce that will be one of he prime drivers of Total Market Valuation.
