*Originally published September 22, 2023
By Tim Courtney, Chief Investment Officer
In recent months, sentiment surrounding the economy, household confidence and spending have generally been positive. A lot of that optimism has been because of the job market and low unemployment rate at 3.8%,1 along with increasing wages and hiring. ADP’s Chief Economist noted last month’s jobs data “are consistent with the pace of job creation before the pandemic.”2
Employers are having to keep pace with growing wage demands, which have reached a record high this year.3 Certainly, there are areas of the economy where wages needed to rise meaningfully to attract workers. The labor market has been rebalancing for a couple of years now. We have noted that many sectors experienced layoffs while others continued to hire. This is likely to lead to a healthier job market without so many of the shortages we experienced over the last few years.
Economics though is dubbed the “dismal science” because, for every economic benefit, there's an associated cost. Unemployment recently ticked up from 3.5% to 3.8%,1 and it is not uncommon for unemployment to bottom and then move higher as we approach a recession.4 It is not at all clear that this is what will happen and it's very possible there is no recession on the immediate horizon. However, inflation caused by increasing wages could keep interest rates high or higher and this will lead to slower growth or increasing inflation.
Also, this high point in wage demands coincides with reports of companies lowering initial hiring wages.5 This trend could be signaling a reversal from the competition for workers we witnessed during the pandemic-induced labor shortages.6 This could be due to an influx of people reentering the labor force. People who left the workforce during the unstable days of the pandemic have started to return, likely because any excess savings from 2020 and 2021 are dwindling or they've taken on debt at higher interest rates.
Real wages typically grow best when worker productivity is also growing. But we know that productivity has been low for quite some time – only 1.4% over the past 15 years and almost a full percent lower than the long term average.7 AI has the promise of improving lagging productivity, but it also could be a threat to some jobs (see current writers’ strikes). This is also going to play a role in wages as companies will try to contain wage pressures with increasing automation.
What we see in the labor market is what we see across general markets – bouncing and noisy numbers as we recover from the unprecedented government policies and household behaviors of 2020 and 2021. This underscores the importance of why, as investors, we stay invested and diversified. If you have any questions, don’t hesitate to contact your Exencial advisor.
- USA Today (9/1/23) — Jobs report: 187,000 jobs added in August as unemployment rises to 3.8%
- PR Newswire (9/30/23) — ADP National Employment Report: Private sector employment increased by 177,000 jobs in August; annual pay was up 5.9%
- CNBC.com (8/21/23) — American workers are demanding almost $80,000 a year to take a new job
- Federal Reserve Bank of Cleveland (2/8/21) — Recessions and the trend in the US unemployment rate
- The Wall Street Journal (8/21/23) — Pay for new hires is shriveling
- Investopedia (11/30/22) — What is The Great Resignation? Causes, statistics, and trends
- McKinsey (2/16/23) – Rekindling US productivity for a new era
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