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Hot Labor Market

Hot Labor Market

February 07, 2024

Since most people reading this Brief are employed or are employers themselves, watching the reports is probably not a top priority. However, the labor market is a key focus for the Federal Reserve as it influences their interest rate policy. After 13 consecutive rate increases that ended in March 2023, the Federal Reserve was successful in bringing the CPI inflation rate from 9% to the current 3.7%. Their decision during the subsequent meetings since March 2023 has been to hold rates steady until market conditions change. One of those conditions that the Federal Reserve would like to see is a cooler labor market and rising unemployment. It would seem nonsensical for the Fed to want more people unemployed, but if employers must keep increasing their labor costs to hire eligible workers, then price increases will follow - aka inflation. Last week, the big news that rocked Wall Street was the January US Bureau of Labor Statistics new job report. Analysts had forecast that the economy would add 180,000 new jobs in January, and the actual increase was 353,000. This surpassed December's 333,000 new jobs report, which was also a surprise. However, unusual hiring can happen during the holiday season. During the month of January, one would expect a decrease in jobs after the rush of the holiday season, but not so during a strong economy. Employers added more jobs in December and January than in the previous four months combined leading up to the holiday season.

Two weeks ago, analysts were predicting a rate cut at the next Federal Reserve meeting scheduled for March 19 – 20. Now, those expectations have dropped to less than a 10% chance with a continued strong labor market. The simple math is more people working provides an opportunity for more household spending that can result in rising inflation.

This brings us to labor participation and the obvious question as to where all the eligible people are coming from to fill these jobs. If unemployment is at a 40-year low, it would seem there is no one else to hire.

The answer may be that the supply of eligible workers may be a hangover from the huge whipsaw experiences during the 2020 coronavirus that resulted in draconian government policies. During March and April 2020, over 21,888,000 people lost their jobs, and only 12,372,000 people were re-hired during the rest of the year. That leaves over 9,000,000 people without a job or becoming a newly minted self-employed entrepreneur.

We wrote about the transition of the workforce because of government policies during the pandemic years as people evolved from W-2 workers who are tracked by the US Bureau of Labor Statistics to self-employed business owners who are not tracked for labor reports. However, the self-employed may be tired of the hard work or lack of stability of owning their business and may be entering the labor market as excellent candidates for new job openings.

It is also worth mentioning that the number of people working – referred to as the "Labor Force Participation Rate" is still at a 40-year low even after the rally of new jobs in the past two years.

What Does It Mean To Me?

A strong US economy is built on a strong labor market. Unique to the US economy, consumer spending is 66% of the nation's Gross Domestic Product (GDP) or the total volume of financial transactions. The good news about the strong labor market is there are millions more who can fill new job openings, which could increase the Labor Participation index by another 8% and still be below the peak reached in 2000.

More people working means more paychecks being handed out that support household spending. Many of these households own their home at sub-4 % fixed mortgage rates that further help their budgets. The Federal Reserve may add some fuel to the economy later this year with lower interest rates that will help nearly all business sectors.

In summary, we maintain our favorable view of the US economy and stock market. Give us a call if you have any questions about this Weekly Brief or would like to discuss your personal financial planning. We welcome the opportunity to assist you and your family.