Craig Holke Investment Strategy Analyst WEEKLY GUIDANCE ON ECONOMIC AND GEOPOLITICAL EVENTS Just How Strong is the U.S. Labor Market? September 11, 2018 Key takeaways» The U.S. labor market is currently the strongest in decades. Payroll growth remains solid, and jobless claims and the unemployment rate remain low.» Productivity and wage growth remain lower than anticipated. Productivity is trending up, which may signal faster wage growth in the future. What it may mean for investors» A solid labor market is supportive of further U.S. growth. Equities are supported by solid economic growth and only moderate wage growth. Employment at the strongest level in decades The U.S. labor market is currently the strongest in decades. We continue to see lower initial jobless claims and unemployment rate, along with still solid payroll gains. These reports continue to support further gains in the labor market and economic growth. The strong labor market supports continued household spending currently driving the U.S. economy. We expect this to trend to continue as both U.S. and global growth remain steady. Reports on initial and continuing jobless claims are released every week. These numbers have continued to decline as the economy recovered from the Great Recession. Jobless claims came in last week below expectations at 203,000, and continuing claims were 1,707,000. While these numbers are the lowest since 1969 and 1973, respectively, it is even more impressive when viewed as a share of the growing labor force 1. The labor force at the end of 1973 was approximately 90.9 million. It currently stands at approximately 162.2 million, for a gain of 78.5%. Chart 1 displays the improvement in the level of claims down to 1969 levels. Yet, it also shows that, as a percentage of the workforce, jobless claims are at the lowest levels since the data started being tracked in 1967. Continuing claims reflect a similar trend. 1 From the U.S. Census Bureau s Current Population Survey. Defined as persons 16 years of age and older. 2018 Wells Fargo Investment Institute. All rights reserved. Page 1 of 5
Chart 1. Jobless and continuing claims are at all-time lows as a share of the labor force 750,000 0.45% 7,500,000 4.50% 650,000 0.40% 0.35% 6,500,000 4.00% 3.50% Initial claims 550,000 450,000 350,000 0.30% 0.25% 0.20% 0.15% Continuing claims 5,500,000 4,500,000 3,500,000 3.00% 2.50% 2.00% 1.50% 250,000 0.10% 0.05% 2,500,000 1.00% 0.50% 150,000 0.00% 1,500,000 0.00% Initial claims (LHS) % of labor force (RHS) Continuing claims (LHS) % of labor force (RHS) Sources: U.S. Census Bureau, Wells Fargo Investment Institute, September 6, 2018. LHS=left hand side. RHS=right hand side. Notes: Data on initial and continuing jobless claims compared to labor force. Data from January 1985 to August 2018. Why do workers continue to experience slow wage growth? While the employment portion of the labor market remains strong, productivity and wages have lagged. Productivity growth, which measures how much output can be produced for a given unit of labor, is trending at the lowest levels since the early 1990s. Low productivity has a direct effect on wage growth. We believe wage growth at this point in the cycle should be higher. As Chart 2 depicts, a tight labor market with an unemployment rate currently holding at 3.9% would suggest wage growth closer to 4%, rather than the recently increased 2.9%. Chart 2. Unemployment at these levels has historically led to much higher wage growth 5.0 11.0 Wage growth 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1985M01 1986M05 1987M09 1989M01 1990M05 1991M09 1993M01 1994M05 1995M09 1997M01 1998M05 1999M09 2001M01 2002M05 2003M09 2005M01 2006M05 2007M09 2009M01 2010M05 2011M09 2013M01 2014M05 2015M09 2017M01 2018M05 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 Unemployment rate Wage growth (LHS) Unemployment rate (RHS) Sources: Bureau of Labor Statistics, Wells Fargo Investment Institute, September 7, 2018. LHS=left hand side. RHS=right hand side. Notes: Chart compares the year-over-year hourly earnings of production and nonsupervisory workers with the U-3 unemployment rate. Data from January 1985 through August 2018. 2018 Wells Fargo Investment Institute. All rights reserved. Page 2 of 5
This is somewhat of a conundrum, likely due to effects such as the large retirements of higher-earning baby boomers. Higher productivity should lead to higher wage growth. As workers are able to produce more, through an advancement in process or technology, and generate more profits for the business, they are able to demand higher wages. Large productivity boosts are difficult to predict in advance. Yet, if the current trend in productivity continues, it should allow wage growth to improve. The strong labor market is also proving a problem for businesses attempting to fill demand for workers, with the share of small businesses finding job openings hard to fill reaching the highest level since being tracked in 1973. Market implications of a strong labor market A strong labor market is very positive for the economy, with household consumption responsible for roughly 68% of purchases. When consumers are comfortable with their job prospects, they tend to spend more freely. Wage growth at current levels is a positive for U.S. equities. Accelerating wage growth approaching 3.5% will begin to increase costs significantly for corporations and consume a larger share of earnings. Moderate inflation and wage growth should keep the Federal Reserve on track for its current trajectory of rate increases, which at the anticipated pace should not pose a threat to continued economic growth in the near term. Overall, we view the labor market as strong and likely to stay that way in the foreseeable future. Eventually, the labor market will likely tighten further, prices will rise driving wages higher, corporate profits will decline, and the cycle will approach an end. In the meantime, having the largest number of working Americans in history with steady wage growth is not a bad problem to have. 2018 Wells Fargo Investment Institute. All rights reserved. Page 3 of 5
Economic Calendar Date Country Report Estimate Previous 9/11/2018 GERMANY ZEW Survey Expectations -14-13.7 9/11/2018 JAPAN Machine Tool Orders YoY -- 13.10% 9/11/2018 US Wholesale Inventories MoM -- -- 9/11/2018 US NFIB Small Business Optimism -- 107.9 9/11/2018 US JOLTS Job Openings -- 6662 9/11/2018 US Wholesale Trade Sales MoM -- -0.10% 9/12/2018 INDIA Industrial Production YoY 6.50% 7.00% 9/12/2018 EUROZONE Industrial Production WDA YoY 1.00% 2.50% 9/12/2018 AUSTRALIA Unemployment Rate 5.30% 5.30% 9/12/2018 US MBA Mortgage Applications -- -- 9/12/2018 US PPI Final Demand YoY -- 3.30% 9/12/2018 US PPI Ex Food and Energy YoY -- 2.70% 9/12/2018 US PPI Ex Food, Energy, Trade YoY -- 2.80% 9/13/2018 EUROZONE ECB Main Refinancing Rate 0.00% 0.00% 9/13/2018 UNITED KINGDOM Bank of England Bank Rate 0.75% 0.75% 9/13/2018 CHINA Industrial Production YoY 6.20% 6.00% 9/13/2018 US Initial Jobless Claims -- -- 9/13/2018 US CPI YoY -- 2.90% 9/13/2018 US Continuing Claims -- -- 9/13/2018 US CPI Core Index SA -- 257.93 9/13/2018 US Real Avg Weekly Earnings YoY -- 0.10% 9/13/2018 US Real Avg Hourly Earning YoY -- -0.20% 9/13/2018 US Monthly Budget Statement -- -$76.9b 9/14/2018 EUROZONE Trade Balance SA 16.2b 16.7b 9/14/2018 US U. of Mich. Sentiment -- -- 9/14/2018 US Retail Sales Advance MoM -- 0.50% 9/14/2018 US Industrial Production MoM -- 0.10% 9/14/2018 US Import Price Index MoM -- 0.00% 9/14/2018 US Capacity Utilization -- 78.10% 9/14/2018 US Business Inventories -- 0.10% 9/14/2018 US Import Price Index YoY -- 4.80% 9/17/2018 EUROZONE CPI YoY -- 2.10% 9/17/2018 INDONESIA Exports YoY -- 19.33% 9/17/2018 AUSTRALIA ANZ Roy Morgan Weekly Consumer Confidence Index -- -- 9/17/2018 US Empire Manufacturing -- 25.6 9/18/2018 AUSTRALIA Westpac Leading Index MoM -- 0.01% 9/18/2018 ITALY Industrial Orders NSA YoY -- 4.90% 9/18/2018 US NAHB Housing Market Index -- 67 9/18/2018 US Total Net TIC Flows -- $114.5b 9/18/2018 US Net Long-term TIC Flows -- -$36.5b Source: Bloomberg, as of September 7, 2018. 2018 Wells Fargo Investment Institute. All rights reserved. Page 4 of 5
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