Weekly Update

A Labor Squeeze Could Be the Inflation Spark

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Published May 7, 2021

The predominant narrative right now in the markets is that inflation will rise as economies reopen and recover. While it’s easy to find inflationary movements in the price of some goods like lumber, houses and food, the primary driver of overall inflation comes from rising wages. Pre-pandemic, wages had been stagnant for years. It looks possible that the pandemic will break the mindset and conditions that kept wages in check, allowing them to rise and inflation to lift. Whether that tick higher in inflation leads to a spiral higher seems unlikely, at least that’s the Federal Reserve’s view. The Fed believes that inflation returns to a more “normal” 2%+ before slowing back down as workers return. The snippet below from the Wall Street Journal outlines some of the issues facing the labor market, issues which will drive wages upward, at least in the near-term.

Where Did All the Workers Go?

Millions of Americans are unemployed. Why can’t companies find workers? Rising vaccination rates, easing lockdowns and enormous amounts of federal stimulus aid are boosting consumer spending on goods and services. Yet employers in sectors like manufacturing, restaurants and construction are struggling to find workers. There are more job openings in the U.S. this spring than before the pandemic hit in March 2020, and fewer people in the labor force, Eric Morath reports.

Changes in job openings from February 1, 2020

The shortage threatens to restrain what is otherwise shaping up to be a robust post-pandemic recovery. Some businesses are forgoing work, such as not bidding on a project, delivering parts more slowly or keeping a section of the restaurant closed. That reduces the pace of the economy’s expansion. Other companies are raising wages to attract employees, which could inflate prices for customers or reduce profit margins for owners.

Changes in job openings and applications since January 2020

Workers could stand to benefit from a temporary reduced supply of labor. They could command promotions and better wages, which they then could spend in their communities, boosting economic output. They might also be able to negotiate more flexible schedules or other perks.

Changes from February 2020

In short, businesses are ramping up while a notable chunk of the workforce remains constrained by pandemic-related issues such as lack of childcare, fears of contracting Covid, and so forth. As the year progresses, these issues will abate. Will these workers be able to return to jobs at a higher price than when they left?

Market Update

The divergence between growth and value stocks drove much of the market’s action this week. After superb earnings results from the Nasdaq’s top stocks failed to spark a rally last week, investors on Monday sold shares in these companies. The tech/consumer index fell -0.5% on the day while the S&P 500 rose +0.3% on strength in energy and materials stocks. The Nasdaq selling accelerated Tuesday in a nearly -2% decline while oil prices ticked higher by +2% to continue investor rotation into cyclical shares. The Nasdaq selling appeared to gain strength when Treasury Secretary Yellen commented that interest rates might need to increase further. The high-growth Nasdaq leaders have found recently rising interest rates to be a serious hurdle to further gains. The strength of cyclical stocks pushed the Dow Industrials average to a record Wednesday while the Nasdaq once again swooned, this time -0.4%. The S&P 500 added another +0.8% Thursday as jobless claims slid. Stocks jumped into the close perhaps anticipating a big monthly jobs report at Friday’s market open. That report was a disappointment, however, as job growth came in well below expectations. The report sent interest rates downward as fears of an overheating economy were dashed for now. The fall in rates sent the Nasdaq sharply higher at the market open before easing to a +0.9% daily tally with all the indexes closing well in the green for the day.

The S&P 500 (SPY) rode the strength in cyclical stocks to a +1.16% weekly gain and a record close above 4200. The Nasdaq 100 (QQQ) suffered much of the week before recovering to a -1.12% dip. Smallcap stocks (IWM) finished flat at +0.22%.

Warm wishes and until next week.