One of the dangers facing our economy is that it is lacking the workers it needs to function appropriately. We have seen the effects of supply chain disruptions in grocery stores, and the effects of understaffing at many places of service. As of the end of February 2022, the US is still 2.1 million workers short of where we were prior to the COVID pandemic – see the chart directly below illustrating the total employees gained or lost (G/L) since February 2020. This datum is important as it means that wages must increase to induce people into the workforce to make up for the missing workers, causing wage inflation and helping to push overall inflation higher.
While we have seen very low unemployment numbers in the latest reports from the Bureau of Labor Statistics (BLS), this does not mean that we have returned to full employment. Many who could qualify are not in the labor pool. This makes the unemployment numbers look very good: the last reading was 3.8% coming very close to the 3.5% rate that was seen in February of 2020.
But it is important to look at charts of recent labor data with both zoom out and zoom in perspectives. When we zoom out (looking at the entire range of BLS data since 1948), we see in the chart below that we are close to all-time highs in employment. We see that the labor force participation rate peaked around 2000 and has had a mostly negative trajectory ever since. Reversing this trend is crucial to the domestic economy because the size of a country’s labor force is a key input into potential GDP growth that is not stimulated by excess government spending.
In the chart below we zoom in on the data, only looking at employment numbers since 2010. Looking at this chart, we see a pre-pandemic linear trend line for employment growth. We can see that if we had followed this pre-COVID employment trend through 2020 and 2021, there would be roughly 157 million employed right now. Compare that to the 150 million currently employed and you can see a potential output gap that has formed.
Does this mean that inflation must come to wages? In the short-term most likely, but we are also reaching a point where the aftereffects of the COVID stimulus bills have run out, and more people need to go out and get a job again. This could be disinflationary for wages in the medium-term as millions of job seekers must now no longer be quite so picky about the jobs and wages that they could get.
Past performance is no guarantee of future results. Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill. Prior to June 2014, Fortunatus Investments was a wholly-owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. The data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
On Monday, March 7th, and Tuesday, March 8th, the EWM Investment Solutions Asset Allocation models reduced their exposure to both emerging markets equity and developed international equity, as both market sectors have moved into long-term unfavorable trends. Each Asset Allocation model is now below its maximum allowable equity exposure level. The International model also reduced its equity level by 10% in defensive moves on Monday and Tuesday. There were no other trades in the EWM Investment Solutions models during the week ending on March 12th, 2022, as domestic equity market sectors still maintain a long-term favorable trend.
Quote of the Week
It seems to be the expressed policy of the U.S., the U.K. and several other major financial centers that Ukraine should be able to get a lot of funding quickly for its war effort. But when foreign policy conflicts with securities regulation, securities regulation tends to win.
Bloomberg Opinion columnist Matt Levine commenting last week on the difficulties investment banks are having in preparing the necessary documentation to offer Ukrainian war bonds to the large number of international retail investors interested in purchasing such volatile securities.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on March 4, 2022 to closing price on March 11, 2022
1 Month = closing price on February 11, 2022 to closing price on March 11, 2022
3 Month = closing price on December 10, 2021 to closing price on March 11, 2022
YTD = closing price YTD = closing price on December 31, 2021 to closing price on March 11, 2022
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