The U.S. Labor Market Needs A Tylenol

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by: Nima Karamlou

Summary

March payrolls disappoint, but largely in response to the weather.

Continued strength in wages and unemployment suggest that the labor market is tight.

The divergent economy and what it means for long-term growth trends.

Overview

Every month, the Bureau of Labor Statistics releases the nonfarm payrolls report that provides market watchers with data on the employment situation. The report consists of data points from the following: nonfarm payrolls, U-3 and U-6 unemployment, labor force participation, average workweek and average hourly earnings. The nonfarm payrolls figures are a critical component to economic analysis because employment is the driving factor toward spending and economic growth.

The labor market continues to underpin bullish sentiment, as 2017 nonfarm payrolls have, for the most part, surpassed expectations. This continues to be the case, even after a disappointing headline figure for the March data. The WSJ survey of economists suggests that the soft number was due in part to poor weather conditions in the month of March that suppressed hiring. I would largely agree, and would further point out that low unemployment is continuing to be supportive of modest upward wage pressure. The latter is a critical catalyst for upside economic momentum as the US economy enters the latter stages of its growth cycle.

Positive Labor Trends Bolster Bullish Sentiment

Encouraging data continues to pour in on the unemployment picture. For the month of March, the unemployment rate dipped to a low of 4.5%, further supporting the argument that the labor market has reached full employment.

For years, the natural unemployment rate considered to suggest full employment was ~5%. However, in recent years, the lack of momentum in the labor force participation rate has forced economists to question the variability of that rate and even lower its perceived value. Lately, I have also been one to question this frame of thinking and further point out the fact that a shortage of skilled workers represents an upside (or downside) catalyst for unemployment. In fact, the current employment report directly mentions this fact, along with a chorus of other economists and world leaders. This dynamic is particularly compelling because it suggests wage pressure from unemployment has yet to take effect.

While it is true that wage gains have began to take effect (wages have risen 2.7% yoy to $26.14), momentum that is consistent with a "full employment" economy has yet to evince, making me cautious on inflation. This year, I have consistently mentioned that the recent pick-up in inflation has been a result of cost-push inflation rather than demand-pull inflation. The economy needs higher-paying jobs to push real incomes higher. To this end, I think it is imperative for policymakers to address the shortage of skilled workers by implementing changes to education standards that can move unskilled workers to skilled positions.

The Divergent Economy

From 2015 to 2016, the US economy stalled due to a bursting of a commodity bubble. Metal and oil prices cratered as oversupply crept upon markets, forcing many companies out of business and many more to shed workers. The manufacturing sector absorbed most of the hit as ISM prints came in below the post-recession averages. This "soft" recession halted stock market gains, forcing 3 major corrections. Meanwhile, jobs and unemployment continued to improve, but the mining and manufacturing sectors continued to show job declines.

March's employment report puts this downturn in perspective. The report mentioned that the mining sector has added 35,000 jobs since October 2016. Interestingly enough, the point that followed cited the retail trade sector as having lost 89,000 jobs since October 2016.

This divergence in data brings up an important dynamic at play, which is the "divergent economy." In the past 3 years, various market sectors have failed and others have succeeded. Today, that sector is retail, while yesterday it was mining and manufacturing. The retail sector has been the target of a rapid shift from in-person to online costing malls, department stores and brick-and-mortar lost sales. The United States is a service economy dependent on service jobs and consumer spending to drive GDP, and a downturn in the sector will indeed show up in the data.

Conclusion

Ultimately, this point begs the question of the trajectory of the US economy. As technology continues to disrupt industries and the marginal worker is weeded out, the buying power of consumers diminishes. It must be considered that the divergent economy may cap the growth trajectory of the US economy.

Disclosure

This article contains the opinions of BlackVault Investments and in no way is acting as an offering and/or solicitation of securities or investment advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.