Unemployment is Low, Really Low
June 8th, 2018 by Tanner Wrisley
Economic health is an extremely important factor with regards to financial markets and portfolio performance, this is no secret. So what is going on in the economy now? Not unemployment! The unemployment rate was calculated at 3.8% at the end of May, the lowest it has been since the 1970s. Since October of 2009, unemployment has been on a steady decline, blasting through the 50-year average of 6.2%[1], down to where we are today. However, we are yet to see an increase in wage growth which tends to occur in the later parts of employment increases – and this makes sense.
The labor market is just like any other market for goods and services defined by the laws of supply and demand. As supply is limited, and demand grows, the price of the good will increase as it gets harder to obtain. In the labor market, the “good” is the employee’s job and the price of that good is their wage. Therefore with unemployment getting lower, the market for employees gets tighter and tighter. The effect of this limited supply of workers will eventually drive the price (wages) up.
Where are we now? – Nearing the end of decreasing unemployment and beginning the start of increasing wages. We are just starting to see upticks in wage growth brought on by expanding businesses looking to fill more positions from a decreasing pool of potential workers. At some point, unemployment will bottom out and eventually begin to trend upwards towards the natural rate of unemployment, commonly believed to be between 4.5% and 6.5%. As is true with everything in economics, these principals hold true with all else being equal. Outside factors may occur that interrupt the natural process of the labor market (policy changes, foreign relations, etc.). But given the data we are seeing now, all indications are this is where the market is trending towards.
So what does all of this mean for the markets and my portfolio? Increasing wages means more money in the pocket of consumers. The other side of this is that companies will have a higher cost of employment which may slow the impressive corporate earnings growth we are seeing currently. However, U.S. GDP growth for 2018 is expected to be 3% or more[2]. This economic growth should be able to keep profits from retreating. These somewhat offsetting factors fall in line with many market analysts’ belief that we will see mildly positive stock market returns by the end of the year.
[1] J.P. Morgan Asset Management Economic & Market Update https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/economic-overview
[2] The Conference Board The Conference Board Economic Forecast for the U.S. Economy https://www.conference-board.org/data/usforecast.cfm