The strong economic recovery in the U.S. continues and can be measured in various ways, such as US GDP growth, strength of corporate earnings, and employment levels. The rapid recovery in employment has been impressive and should continue to be a tailwind for economic activity, but also could be a factor in inflation staying higher for longer. As a result, the recovery in jobs and growth in wages will have implications for both the stock market and bond yields.
Two ways to measure the health of employment is the number of people unemployed, as well as the number of job openings. The JOLTS (Job Openings and Labor Turnover Survey) is a monthly report that shows the number of unfilled jobs in the U.S. Per the chart below, JOLTS levels in July 2021 reached a historical high with over 11 million job openings (red circle). The pace of job recovery has been extraordinary, as can be reflected by this all-time high JOLTS data comes only a little after a year from the April 2020 all-time high in unemployment (blue circle) of 23 million people.
It is historically rare to have more job openings than those that are looking for work. The chart above shows this is the current situation as the job openings line (maroon) is above the monthly unemployment line (gray). This trend last occurred in 2018 and 2019 when the unemployment rate hit 50-year lows.
On the surface, there are enough job openings for everyone that wants to work. Examining this issue more closely, there are reasons those unfilled jobs may remain open as some people are hesitant to work or simply aren’t a proper fit. These issues include:
- Labor force/skills mismatch
- Continued healthcare concerns with Covid/Delta variant
- Childcare and transportation issues
- Government assistance programs
Whatever the reason, the reality is labor supply is currently struggling to keep up with labor demand. Companies are finding it difficult to fill open positions which means the growth potential of the economy is suboptimal. Tight labor markets also put upward pressure on wages, which can be seen in the wage growth chart below. Wage growth (red circle) was up 4.2% year over year, which is the highest level since 2007.
Wage growth has implications for both the stock market and bond yields. Increases in wages should allow workers (consumers) to pay their bills and spend money on discretionary items like home improvement and travel. As the U.S. economy is driven by consumer spending, this should be a tailwind to continued economic growth. Corporate earnings growth will also benefit from higher demand from consumers, but wage growth can be a headwind to earnings if rising costs cannot be passed through to their customers. On the bond side, wage growth tends to cause price inflation and higher economic growth which historically moves interest rates higher and bond prices lower.
The U.S. Federal Reserve has commented many times that elevated levels of inflation are transitory (temporary). Rising wages for the labor force, however, may not be as transitory as goods or services that are temporarily disconnected due to supply chain constraints. At Gradient Investments, we believe that wage growth is likely to be at elevated levels for a longer period. This combined with continued economic growth, creates a higher probability of interest rate increases. Therefore, we remain cautious on bonds. Regarding stocks, individual companies are affected by wage growth in different ways. As we look to invest in companies, understanding their pricing power and ability to pass through costs will be critical in assessing which stocks are valuable in a rising wage environment.