By Tim Courtney, Chief Investment Officer
We are all well aware of the primary economic story over the last year and a half: inflation and the Federal Reserve’s response to it. It originated with the supply chain problems and global shortages originating from lockdowns/reopenings of 2020-21.1 It continued and accelerated as some workers decided to drop out of the labor force or work fewer hours.2
The supply chains have gotten healthier and companies are working to shore up their logistics for the future. Labor markets though remain in flux and volatile. Unemployment is very low3 and certain industries are struggling to maintain operations because they can’t attract enough workers.4 Conversely, we are seeing widespread layoffs, particularly by tech companies.5
This labor market volatility could be a sign that a larger economic rebalancing is taking place. As we have noted before, the decade that ended in 2021 was a historical one for technology and communications companies. Capital flowed freely into these fast growing companies from every direction, encouraging them to spend and hire. Many of these companies were profitable with good business models. Many were startups with no history and no expected profits for years but with backing from venture capital leveraged under very low interest rates.
Workers flocked to this area for faster growth and potentially higher compensation. The most profitable of these companies became mega-cap companies and by the end of 2021, created an S&P 500 index that was more concentrated in its top 10 names than ever before. Meanwhile, other sectors struggled to attract capital and retain workers. Reinvestments that were needed to maintain and grow capacity often weren’t made. This created a situation with very little margin of safety. For instance, we saw headlines in 2021 and 2022 about cargo ships needing to anchor for weeks outside major ports because there weren’t enough dock workers to unload them.6 In many ways, the economy had become unbalanced.
As consumers and diversified investors, we’d prefer all economic sectors be dynamic and productive. An economic rebalancing may need to take place for this to happen, and we may be in the midst of it right now. For the longest time, there was a shortage of coders and computer programmers. Now we have the opposite issue. Rather than digital solutions, many companies need physical solutions. Technology and automation will certainly help some in this regard. But addressing a lack of physical labor may actually turn out to be more difficult than addressing a lack of mental labor (see all of the ChatGPT stories).
We don’t yet know how this will work out. We also don’t know how many people who dropped out of the workforce, quiet-quit or prefer to work part-time will be open to working in the industries that need workers. However, the decisions made by those in the labor market will have an effect on inflation – the part of inflation that interest rates may not be able to affect.7
If you have any questions, please contact your Exencial Advisor.
- CNN (9/4/22) — Covid-19 pandemic timeline fast facts
- Harvard Business Review (9/15/22) — When quiet quitting is worse than the real thing
- PBS (1/6/23) — December unemployment falls slightly to 3.5 percent, tied for a 50-year low
- U.S. Chamber of Commerce (1/19/23) — Understanding America’s labor shortage: The most impacted industries
- Fox Business (1/26/23) — Tech layoffs continue as IBM, SAP announce massive cuts
- The Wall Street Journal (10/21/22) — Southern California’s notorious container ship backup ends
- CNBC (12/15/22) — Fed raises interest rates half a point to highest level in 15 years
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