by Ralph Cole, CFA
Director
Equity Strategy and Portfolio Management
It’s always a strange time in the market when good economic data is treated as bad news. As investors, we can’t help but feel good about the jobs report today, even if it means the Fed will keep aggressively raising short-term interest rates in the coming months.
US Employment Back to All-Time Highs
After the 2008 financial crisis, it took the economy 76 months to fully recover the jobs that were lost during the recession. Today, the U.S. economy reached all-time employment highs, taking only 29 months to recover the jobs associated with the 2020 pandemic-caused recession. The unemployment rate has dropped to 3.5%, even with 63,000 people leaving the labor force.
A fascinating part of the pandemic recovery is the number of people who seem to have gone missing from the labor force. The chart below highlights U.S. labor force participation rates, as well as who has exited the labor force. The labor force participation rate is defined as the proportion of economically active people in the U.S. aged 15 and older.
Source: Goldman Sachs
We don’t expect the 1.7 million people who have left the labor force for early retirement, or just aging out of the work force to come back to work. We do, however, expect the 1.4 million people between the ages of 16 and 54 who exited the labor force to re-enter. But what will bring them back? We believe the answer lies in reducing government transfer payments, i.e., no more stimulus checks, and increasing wages. We also have a hunch that people who have earned a living trading cryptocurrency and meme stocks will have to find more stable employment as well.
Higher wages at this point in the economic cycle is the negative aspect of the employment report this morning. The Federal Reserve is aggressively raising interest rates in order to slow inflation, but wages continue to rise at an unsustainable level. After rising 0.4% in June, wages were up 0.5% in July at an annual rate of 5.2%. The Fed will take this as a signal that they need to continue to raise the Fed funds rate in the fall.
Takeaways for the Week
If economic data is too good, the market sells off in fear of more tightening from the Federal Reserve
We continue to see volatility for the markets as the Fed walks the tight rope between lowering inflation without crushing the economy