Is America Running Out Of Workers?

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by: Brian Gilmartin, CFA

With the 4th of July holiday falling where it does this year - in the middle of the workweek - the ADP (private sector payroll report) and the weekly jobless claims release are both scheduled to be released tomorrow morning, July 5, 2018, and then we see the June jobs report Friday morning, July 6th, at 7:30 am. ( I happen to pay particular attention to the weekly jobless claims data since it can be an early warning indicator for the US economy, and as Jeff Miller over at A Dash of Insight (www.dashofinsight.com) has talked about over the years, the weekly publication of the data gives investors a more frequent data point to hone in on, along with the 4-week moving average of jobless claims.)

Both the Treasury market and the major US equity indices have started the 3rd quarter in a rather weak fashion, unexpected given that Q2 '18 earnings will be quite solid - expected at +21% - while perhaps more importantly expected S&P 500 revenue growth for Q2 '18 is expected at +8%.

However, all of this can be trussed out later, under a different headline.

Dr. David Kelly and his research team at JP Morgan publish what is, in my opinion, one of the best quarterly research pieces on Wall Street with the release every 90 days of JP Morgan's "Guide to the Market" (GTTM).

It is a 75-80 page research publication of tables and graphs that does a fantastic job highlighting various aspects of the capital markets and US economy.

Dr. Kelly held his quarterly Guide call for investors yesterday and asked the above question: "Is America Running out of Workers?"

What surprised me is that Dr. Kelly is even more bullish around the US economy than I am, thinking that the unemployment rate can fall all the way to 3% (eventually) and he also thought - and I was very surprised to hear this - that Q2 '18 GDP could see a 5% print. Wow…

Listening to the financial media the last few weeks, I've heard some pundits talk about a robust 2nd quarter, 2018 GDP, but I didn't think we'd see a 5% print.

The initial or preliminary release of Q2 GDP comes in the last week of July '18.

The Treasury market is going to get more key labor market data in the next 72 hours starting with Thursday and then Friday morning's jobs number. Per Briefing.com, consensus economic expectations are looking for 195,000 to 205,000 jobs again in June (195,000 private payrolls) versus the 223,000 initially released for the May '18 jobs report.

The jobs report has been remarkably consistent with its monthly forecast around 200,000 for what seems to be the last 36 to 48 months. To me anyway, it seems like the jobs forecast is automatically set around 200,000 jobs every month.

Dr. Kelly's point is a good one about the US running out of workers - in fact, it could restrain or constrain faster US economic growth. Remember though, job growth is "net new jobs" (as Jeff Miller has also explained over the years, given the "Old Prof's" penchant for educating his Dash of Insight readers), so just because it means that 200,000 jobs were created in the US economy, it likely means 1,000,000 jobs were possibly lost in retail, financial services, consumer staples, and other sectors, and 1,200,000 gained in tech (or retail) or mining, or health care or whatever. (Those sectors are merely used for examples.)

The US hasn't seen a sustained unemployment rate below 4% since the late 1960s or during the Vietnam War when 18- to 22-year-old males were being drafted into the military.

The US economy is entering an interesting period. My own opinion is that stronger economic growth and higher interest rates still lay ahead.

The 10-year Treasury yield peaked at 3.11% in mid-May '18 or about 7 weeks ago. The 30-year Treasury yield also peaked that same day at 3.25%.

Thanks for reading, and a Happy 4th of July to all of this blog's regular readers.