The Feds Response To A Tight Job Market

Labor Markets Are Tight With Little Signs of Loosening

Employment in May grew by 390,000, driven by strong gains in leisure and hospitality, professional and business services, along with transportation and warehousing. Job growth does not exist in an economy that has a high chance of going into a recession. The 3-month average gain dipped from the highs from last year. “A softer trend is consistent with the slowdown in economic growth in the coming quarters but not outright contraction,” explained LPL Financial Chief Economist Jeffrey Roach. Unemployment in May was 3.6%, unchanged for the third consecutive month and average hourly earnings increased 5.2% from a year ago. In this communication, we look at the lingering effects from the pandemic and why the labor market is stubbornly tight.

Unemployment is Too Low, Too Long for Some People

One reason that unemployment is low is due to the large number of individuals not in the labor force. Relative to pre-pandemic levels, the economy has an excess of roughly five million people who do not have a job nor are looking for a job. The Bureau of Labor Statistics does not include individuals without a job if those individuals are not actively looking for work.

The long-term unemployed account for roughly 23% of all unemployed persons and should be a concern as “skill erosion” sets in for those out of work for an extended period. Even after social distancing restrictions lifted in many areas, schools and day care facilities remained constrained last year, causing many caregivers to remain unemployed. Those unemployed for over 27 weeks are considered long-term unemployed.

Construction Job Market Is Especially Tight

The National Federation of Independent Business (NFIB) reports that 61% of firms in all sectors are having few or no qualified applicants for current job openings. This metric is at all-time highs. The construction sector is more concerning with 69% of construction firms reported few or no qualified applicants. As a result, firms are raising total compensation to attract and retain talent. We see this as a risk to the inflation outlook if these imbalances remain and become embedded in the economy.

From the earlier Job Openings and Labor Turnover Survey (JOLTS), the labor market is extremely tight as quit rates are high, revealing that workers in many industries know they can likely get higher wages if they move from one firm to another. Still, the economy had roughly two openings for each unemployed individual.

Federal Reserve Likely to Continue on Projected Tightening Path

Job gains in May were broad based and resulted in another good labor report. The Federal Open Market Committee (FOMC) will likely emphasize the imbalances in price stability over supporting labor markets. As job gains moderate and more people come into the work force, we could see the unemployment rate increase, removing some of the tightness of the labor market.

Inflation is the paramount concern for committee members and a tightening labor market adds fuel to the fire. The Consumer Price Index (CPI) data for last month will be released on Friday, June 10th and the Producer Price Index (PPI) data will be released on Tuesday, June 14th for May. Both numbers play an important role in measuring inflation.

CPI measures the average cost of goods and services that a consumer experiences and is the most well-known measure of inflation. PPI measures the average cost of goods and services that a producer incurs. If the producer's price is going up then it costs more for the producer to make the product so they will charge the consumer more. This concept is referred to as pricing power. To learn more about inflation, we encourage you to read our communication, "Why Are The Markets So Volatile."

Based on a number of factors, including those outlined in this communication - we expect to see the FOMC increase rates again in June.

If you have specific questions related to your own investments or financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you.


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All index data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.