Still on a Strong Track
Recession prospects were pushed out even further in light of the strong job growth reported last week, which increases the likelihood of more rate hikes by the Fed to contain inflation. Wage inflation prospects also rose, even as reported inflation was slightly more moderate. A soft landing, a moderation in economic growth along with a simultaneous slowing of inflation to the Fed’s 2% target, may become more difficult to achieve without more rate hikes by the Fed.
An earlier apparent softening trend in hiring and economic growth was eviscerated by the latest jobs report. Prior hiring estimates were revised upward by 119,000, even as 336,000 new jobs were added in September. Along with the unexpected surge in job openings, it is clear that growth is not slowing. It might even be gathering some steam, despite an unemployment rate that remains at exceptionally low levels. From the Fed’s perspective, this was a very troublesome report.
Wage inflation was reported at 0.2% for the second month in a row, but that doesn’t provide much cheer. To quote Randall Forsyth in the latest issue of Barron’s, “With the jobless rate hovering near historic lows, and the latest Job Openings and Labor Turnover report showing a 700,000 jump in openings to 9.6 million in August, and new claims for unemployment near record lows (just 207,000 in the latest week), now would be the time for workers to press their claims for better pay.” Indeed, that’s just what they’re doing. With sizable pay package increases already agreed to by the airline industry and transportation companies like Fed Ex and UPS, new deals for screenwriters, and strikes by the UAW against the auto companies and by healthcare workers against Kaiser Permanente, it is hard to envision that labor costs might continue to moderate. Even worse, some of the moderation in wage inflation might be a statistical illusion.
According to my calculations, leisure and hospitality worker employment rose by 4.27% over the past 12 months versus an increase of 2.08% for all workers, so more than double the overall pace of hiring. But the average worker earns $33.88 per hour, while leisure workers are paid just $21.27, more than one third less. As rising numbers of lower paid workers are included in calculating the average wage, they drag the average down, even as they are experiencing higher rates of wage inflation than the average.
The jobs report reveals that the pace of growth continues to exceed the growth potential of the economy. Over the past year, a 3.1 million surge in the labor force provided the influx of workers looking for jobs that enabled firms to hire well above underlying demographic trends. It’s good news, but unsustainable. As soon as labor force growth reverts to its underlying trend, which is ballparked between 600,000 and 1,200,000 annually, labor scarcity will worsen, exacerbating the upward pressure on wage rates and inflation.
Why has the labor force surged? One positive factor is that baby boomers who retired involuntarily during the pandemic were induced to return to the job market by better pay offers and improved prospects for being hired. A second important factor may be the return of more women to the workforce who had previously stayed home to care for children during the shutdown. The end of various programs to finance this activity is pushing those people back into the job market. This will soon run its course. A third factor, one that is also less sustainable, is that illegal workers have resumed entering the U.S. in large numbers to look for work. Domestic politics could sharply reduce this immigration flow at any time with inflationary consequences. (In fact, the Biden Administration recently announced that it will build more walls on the Southern border to stem the flow of immigrants.)
The Fed’s objective has been to get inflation back to its 2% target by slowing growth to a more sustainable pace that moderates hiring and wage increases to contain inflation. Strong job growth works against that approach. The Fed could choose to resume some rates hikes, or give the economy more time to see if the already implemented policy changes bring it closer to its final objective. The latest data suggest they are not making as much progress as intended. But they could also give it more time, as preferred by a number of senior officials. Nonetheless, their patience will be limited.
Advisors Capital Management, LLC is an investment advisor registered with the United States Securities and Exchange Commission. Registration does not imply any degree of skill or training. All investing carries risk, including the potential for the loss of principal and past performance is no guarantee of future results. This content is for informational purposes only, can change at any time without notice, and is not investment advice or a recommendation to trade any security. Indices are not available for direct investment. We only provide services in jurisdictions where we are registered. Our disclosure brochure (ADV Part 2A) and customer relationship summary (ADV Part 3) are available at https://adviserinfo.sec.gov and upon request.
