Labor and Inflation Data Provide Some Clues

| July 15, 2022
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The U.S. added 372,000 jobs in June, at just a slightly lower clip from May, while the unemployment rate remained unchanged at 3.6%. The participation rate dipped to 62.2% in June as individuals dropped out of the labor force.

In contrast to what some pundits are suggesting, the economy is not currently in recession. The job market is too hot for that scenario – at least for now. We expect the labor market to expand throughout the next several months but at a slower pace as firms still struggle with finding suitable workers. Firms will still likely be increasing wages as they deal with a shortage of qualified workers and elevated quit rates. The National Federation of Independent Business reports that 60% of firms have few or zero qualified applicants for current job openings so this could turn into a long-term problem with the U.S. workforce.

Now for the good news. Job gains were broad-based in June. Every major sector added jobs except Government. Business Services, Education and Health Care along with Leisure and Hospitality sectors all experienced outsized gains in employment.

The ideal scenario for policy makers would be a slow deceleration in job gains as the economy progresses throughout this year. As shown in the Chart below, the 3-month average change in job growth slowed to 375,000 in June. “The trajectory for job growth really can’t get much better than this,” says LPL Financial Chief Economist Jeffrey Roach. This could be the perfect scenario for the Federal Reserve (Fed). A measured cool-down in job growth and a slight uptick in unemployment could be the antidote for treating the extremely tight labor market.


 

View enlarged chart.

 

The high number of people not returning to the work force is one of the nagging problems with the labor market right now. Relative to pre-pandemic levels, the economy has 4.8 million more people out of the labor force. Some likely took early retirements but that does not explain all of the story. If individuals do not reenter, the labor market could remain tight. However, as inflation pressures linger, we think that some individuals will eventually return to work.


 

View enlarged chart.

 

Job gains in June were broad based and with another good labor report, the Federal Open Market Committee (FOMC) can emphasize the imbalances to price stability over supporting labor markets. Inflation is the paramount concern for committee members and a tightening labor market adds fuel to the fire. 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. Unless economic data deteriorate quickly, the FOMC will likely increase rates again in July by 75 basis points (0.75%).

It is true that the current inflationary environment has been irritated by supply-related problems with ports, international manufacturing shutdowns, and global shipping as primary challenges. And indeed, these have been major factors in inventory management. For example, auto manufacturers are still hampered with ready access to necessary components. As shown in the Chart below, inflation surprised markets with an accelerated inflation print last week, although the more comprehensive metric of inflation, the Personal Consumption Expenditure (PCE) deflator may not be as hot. The PCE deflator for June will be published on July 29.


 

View enlarged chart.

 

For the past year, supply-related problems contributed more to inflation than demand-related imbalances as shown in the gray box in the chart below. China’s zero-COVID policy was one of the biggest glitches in supply chains as metro areas and ports were shuttered by the Chinese government. However, things may be on the verge of changing. In May, the latest data point for the PCE, demand-driven contribution to inflation was slightly higher than the supply-driven contribution. This is an important development because the Fed’s monetary policy tools do not work on supply shocks but rather, only on demand.


 

View enlarged chart.

 

The good news is that inflation may become more demand-driven and less supply-driven. This is positive for policy makers because monetary policy tools are now more relevant than they were when inflation was primarily from supply bottlenecks. So as supply constraints ease and as Fed tools become more impactful, we could see the rate of inflation decelerating in the latter half of this year.

As always, if you have questions or would like to set up a meeting to review your portfolio, please don’t hesitate to book a meeting with us using our online link below:

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All the best,

Bryan Foronjy, CFP®

Founder and Principal Wealth Manager

Foronjy Financial

CA Insurance Lic. # 0F84170

www.foronjyfinancial.com

 

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IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Tracking # 1-05302836

 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Tracking # 1-05300409

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