Tim Courtney, Chief Investment Officer
In 2020, lockdowns forced layoffs across industries and unemployment soared. Now, just two years later, the pendulum has swung the opposite direction and we face a shortage of workers. The July jobs report showed a surge of 526,000 new jobs and a 50-year low unemployment rate of 3.5%.1 To put this into perspective: there were 11.2 million total job openings, which equates to two jobs for every unemployed person.2
Historically, the U.S. has been known for its robust work ethic, with workers averaging 1,791 hours per year, higher than nearly all other developed markets including Japan, Canada, Germany, Italy, France and the United Kingdom.3 However, the pandemic reshaped the workforce, with many older Americans opting to retire early and others seeking more flexible work schedules or jobs with reduced hours. Our labor force participation rate remains 1% below its February 2020 level,4 and people talk more openly about “quiet quitting” their jobs, or working at a minimal level. This is having an effect on inflation, the quality of goods and services produced and our economy overall.
Production: Anecdotally, we have all seen the impact of labor shortages with shortages of products, longer wait times for services and even reduced business hours for shops and restaurants unable to find workers. Following increased demand for goods during the lockdowns, demand has been shifting towards more labor-intensive service industries where companies have had to increase wages which, in turn, has impacted inflation.5 The assumption has been that supply would benefit from increasing productivity, but productivity remains flat.
GDP: Persisting production challenges due to labor shortages can slow economic growth overall. We’ve already seen real (after inflation) gross domestic product (GDP) decline for two consecutive quarters. Additionally, the decision by many Americans not to re-enter the workforce, or to do so in a limited capacity, means there is less disposable income that can be injected in the economy. This will also impact economic growth — consumer spending remains the largest component of GDP.
Automation: As mentioned, labor-intensive industries are hurting from the lack of workforce participation. One change that has been ongoing but will likely accelerate is automation with robotics and software to fulfill the roles of human workers. While this is not a short-term solution (robots are not being rolled off the assembly line to take human jobs), an unwillingness to take certain jobs is providing more incentives for companies to automate them in the long term.
In August, we saw a slight decrease in job creation with 315,000 jobs added, but the labor market remains tight. Short term, we expect the impact will be felt through continued high levels of inflation, slower productivity growth and more workers becoming burned out. If labor force participation in the U.S. continues to weaken, we might expect slower economic growth as we’ve seen in Europe. If you have any questions about how the labor market might affect your portfolio, please contact your Exencial Advisor.
- The Wall Street Journal (9/2/22) – August jobs report shows labor market has cooled but remains solid
- Reuters (9/22/22) – U.S. labor market resilient as recession signals grow stronger
- OECD Data (2022) – Hours worked
- Bureau of Labor Statistics (9/2/22) – The employment situation – August 2022
- Investopedia (6/29/21) – The importance of inflation and GDP
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.