Weekly Commentary June 15, 2018
Is the Jobs Market at a Tipping Point?
By Tim Courtney, Chief Investment Officer
The jobs reports released the past couple of months showed some astonishing numbers. For the first time since the statistics have been reported, job openings outnumber unemployed Americans1. With 6.7 million of the former and only 6.3 million of the latter2, there’s suddenly a gap between the jobs companies need to fill and those potentially available to fill them. “Too many jobs” sounds like a good development, but many investors may be wondering if it’s too good.
The U.S. economy remains one of the most reliable and strongest in the developed world3. It’s strong enough that equity prices have moved much higher in recent years4, and any imperfect news can lead to tremors of volatility. This positive jobs news will continue to perpetuate positive expectations, allowing the U.S. markets to trade at up to a 40 percent premium to other markets5.
But economics lives up to its “dismal science” description as any silver cloud has a dark lining. With this good news comes some fear of much higher inflation and interest rates, which could start to eat away at gains in wages, net investor returns and purchasing power. The Federal Reserve is watching this closely and has communicated their plan to continue to raise rates to keep inflation at bay6. But it is unclear if this labor shortage will lead to near-term inflation due to wages moving higher quickly.
There’s a possibility that current job hunters are holding out for a dream scenario – the perfect opportunity with high wages – and they won’t settle for anything less. This could lead to increased competition from employers who would offer higher pay and eventually be forced to raise prices. If this is the case, interest rates and inflation are likely to rise. Since equity markets like inflation rates where they’ve been sitting for the past few years (at about 1 to 2 percent7), anything higher may cause the market to pause.
The other reason for the gap could be a skills mismatch. It’s possible the U.S. is simply not producing enough workers with the right skill sets to fill the jobs that are actually open. Companies in fields such as engineering, mechanics, and science have been complaining for years that they are struggling to find qualified candidates8. If this is what’s causing the gaps between jobs and job seekers, it’s more likely that outsourcing workers will be what fills the holes, and this may allow inflation to remain at a lower level.
Whatever the cause of the gap, the jobs report remains a positive sign of U.S. economic stability. It’s a sign of a strong U.S. economy and is a reason why U.S. assets are trading at premiums. Earnings have also looked good this year9, paving the way for further success in the U.S. economy and leaving a slight cushion for wage increases.
We won’t know how the wage inflation and interest rate game will play out until it is determined which of these two factors is contributing to the difference between job seekers and unfilled jobs. In the meantime, we will continue to keep an eye on interest rates and inflation, as well as their potential effects on the market.
5 DFA Equity Characteristics, Price-to-Book and Price-to-Earnings Valuations as of 05/31/2018
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