When it comes to financial market returns over the longer term, it is generally the case that shorter-term policies of one U.S. president or another do not tend to hold that much sway, given that their best or worst tendencies are often reined in by Congress, and their time in office to actually make significant changes may also be somewhat limited relative to the investment horizon. Rather, it is the underlying structural trends with regard to both the economy and inflation that tend to matter most.
This is something we have depicted in past Economic Weeklies, for example, when looking at the similarity between sector returns for the first three years of the Obama administration and those of the Trump administration—in contrast to what one might have expected to see given such different personalities and politics. However, this is not to say that policies do not matter entirely, particularly when it comes to policies that directly impact growth in the labor force and growth in productivity—given that these are the two main drivers of an economy’s trend rate of GDP growth.
In recent Economics Weeklies we have discussed trends in productivity, and in this week’s issue we examine labor force growth given this week’s jobs report later today. Specifically, we look at the labor force participation rate (LFPR) during the COVID crisis and what could happen over the longer term. A comparison with Canada highlights where a potential improvement could be made with regard to female participation that would have a dramatic effect on increasing labor force participation, the pace of future trend GDP growth—and financial market returns.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.