May 2017 – Monthly Commentary
We’ve written on several occasions about the robust job market and the most recent Job Openings and Labor Turnover Survey (JOLTS) served to further bolster that fact. JOLTS represents the inverse of the unemployment report in that it measures the number of unfilled jobs in the economy. Since touching a low of on 2.1 million in the summer of 2009, job openings have steadily grown, with the latest measure surpassing six million for the first time since the survey was established. Hiring managers attribute the growing number of unfilled positions to a mismatch of worker skills versus employer needs. We suspect that was what drove the disappointing payroll gain in the May jobs report. Consensus was expecting a creation of 182,000 jobs for the month, slightly below the recent trend, but the actual number was well below that at 138,000. Despite the undershoot stocks continued to rally, as did the bond market, counter to normal price action. Typically, bond prices rally when economic activity is slowing as investors anticipate stimulus from the Federal Reserve. In such a scenario, stock prices would react to the slower growth by falling as the prospect for future profitability comes into question. Instead, in the days following the employment report, the S&P 500 rallied to an all time high. The rationale offered by analysts was that slowing employment growth would dissuade the Federal Reserve from raising rates as fast as consensus had feared. With rates remaining low, yield starved investors would continue to allocate assets to the equity market.
Our thesis on the job market is different than consensus. We believe that the economy has reached full employment and that with JOLTS at an all time high, the demand for labor is far outstripping supply. The imbalance is forcing employers to “bid up” the price of new hires. We’ve seen evidence of that in average hourly earnings which is growing between 2.5% and 2.8% annually and has steadily been ticking higher over the last 18 months. There is the argument that the lower rate of participation in the job force will keep wages from rising very much further. That assumes that those not in the work force are not participating because they have become discouraged by the lack of work. Again, we disagree with that view. Many of those individuals not in the workforce are receiving permanent disability benefits from the Social Security Administration. Disability benefits skyrocketed under the Obama administration. Those people will not be coming back into the workforce unless the wage they can earn significantly exceeds their benefits. Also hampering growth in the workforce is the aging of the baby boomer generation. While it’s not unusual for seniors to work well past the traditional 65 year retirement age, there does come a time when even the most energetic senior citizen just can’t keep up with his or her younger self. We believe that those two factors are distorting the labor market and are directly attributable to the rising cost of labor.
Also, we expect the minimum wage initiatives that have been implemented over the last 18 months will have an upward push to wages. Many locales have targeted a minimum wage of $15 hour, implemented over a several years. With minimum wage steadily rising, it’s likely to push the wages of those currently making that amount higher. Keep in mind, a $15 hour wage for a full time worker equates to $31,200 annually. Such a rate of pay seems excessive for workers such as pot scrubbers, car wash workers, and much of the unskilled labor force. The minimum wage hike has been the subject of much debate, but the likely outcome will be that wages will rise, workers will be laid off, cost of goods and services will rise, and businesses will fail. When politicians dictate what the market will bear, it’s called Socialism and that doesn’t work out well in a capitalist economy.