CAMS Weekly View from the Corner – Week ending 7/6/2018
July 9, 2018
This past Friday the Bureau of Labor Statistics (BLS) released the U.S. monthly employment results for June. The number of new jobs created came in at 213,000 which was higher than expected.
The June employment report continued the theme of a strong employment market as well as respectable wage growth rates in the upper 2% range.
The problem is inflation is running just below that range. This has left the difference between the two marginally positive which has been a long-standing issue in the U.S. in particular since 2000.
With the tremendous demand for employees most expect to see these wage growth rates pushing higher. What gives?
Click for larger view: https://fred.stlouisfed.org/graph/?g=kmOM
Within the monthly employment report there is a category called “Not in Labor Force.” People are included in this category if they do not have a job and are not currently seeking a job.
There are numerous discussion points around this category but we will stay on-point here and use it to help us understand, in part, why wage growth rates are improving but not as quickly as many would expect in light of the strong employment backdrop.
Think pent up supply of workers relative to demand for workers
The above chart dates back to the mid-1970’s for historical perspective. It is simply taking the number of workers in the Not in Labor Force category and showing it as a percentage of the number of people in the “Working Age Category – ages 15-64.”
Obviously, in the last 15 years-plus the amount of people (and the tenacity of the trend) in the working age category that are not working has become epic compared to the history of this 40-plus year chart.
Keeping it simple, the above tells us that nearly half (46.5%) of the working age category are not working nor are they looking for work.
All told, this represents a tremendous amount of supply of workers. As they come back into the Labor Force this plays a role into “taming” the upward trend of wage growth rates.
Interestingly, through this lens the June report reflected 600,000 new entrants into the Labor Force by way of seeking a job or having found a job.
That number reflects the untapped employee pool and if this continues will play a role in keeping wage growth rates from spiking higher.
A spike higher could cause an inflation and interest rate scare that would certainly play out negatively in markets. Conversely, a gradual trend higher would be optimal in various markets. Per the above, gradual may be the most likely experience near-term.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
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