by Adam Jones
Last Friday (May 7th) saw a major disappointment for US economic forecasters. The Department of Labor’s closely followed employment report showed the economy having added just 266,000 jobs over the month of April [1]. Whilst this is an unquestionably large number it compared starkly with a consensus expectation of over 1,000,000 newly employed Americans.
The resulting unemployment rate leaves the US economy needing to add back over 8 million jobs in order to regain pre-pandemic levels. This is a huge feat and it could be argued that April’s report was a disappointing first step.
Looking across a broad spectrum of economic indicators suggests the outlook for growth in 2021 remains incredibly robust, with the supply side scrambling to regain its footing sufficiently quickly to meet the incoming wave of demand as economies reopen. The National Federation of Independent Business (NFIB) produces a monthly survey [2] in which over 44% of respondents reported having job openings that they were simply unable to fill during April.
In our view there are a number of specific issues reducing the speed with which US businesses are able to take on new workers;
- Unemployment Insurance – The US Treasury introduced a number of emergency assistance programs for American workers in the wake of Covid-19. The primary source of income for those affected stems from the ‘American Rescue Plan’ which was initially introduced in March 2021 and will continue to distribute $300 per week for qualifying individuals until early September 2021.[3]
- Fear – A US Census Bureau survey conducted in late March found that over 4.2m adults are currently not working because they are afraid of contracting or spreading the virus. [4]
- Early Retirement – Many of those in the later stages of their careers are taking the decision not to go back to work at all as and when life returns to normal. A recent survey from the New York Federal Reserve showed that the number of people expecting to work beyond the age of 67 fell to a record low of 32.9% last month [5]. This makes some sense in the context of equity markets (and hence retirement accounts) sitting at all-time highs coupled with ongoing strength in the value of US housing.
- Childcare Availability – Many schools and childcare centres remain closed, with some likely to remain so indefinitely given low operating margins, reduced enrolments and higher costs as a direct result of the pandemic.
One issue that has so far received little media attention is the idea that the virus has given people sufficient time and space to consider a much broader re-assessment of their working lives. A recent study from the Pew Research Center found that 66% of those surveyed have seriously considered changing their occupation or field of work altogether since becoming unemployed [6]. It is not a huge stretch to imagine that we could be facing a skills mismatch which is under-appreciated by markets.
Some of these challenges will, of course, resolve themselves naturally over the coming months but any hint of persistence in labour market tightness will only add to the already long list of existing challenges faced by goods and service providers who are struggling intently to keep up with demand.
So, what does this mean for markets? For some time, we have maintained a bias within portfolios toward more inflation-sensitive assets such as UK & European equities, Commodities, Real Assets and Inflation-Linked Bonds having steered gently away from those assets where valuations appear to be particularly vulnerable to higher interest rates [7].
Our analysis of government bond yield curves, inflation-linked assets, commodity, and equity markets all point to a market which, in our view, firmly expects that current levels of inflation will prove to be transitory in nature. This analysis holds true even in the wake of last week’s Consumer Price Index (CPI) data, which came in at a much higher rate than generally expected (4.2% per annum, a rate last seen in September 2008) [8].
The longer term dynamics of inflation are perhaps beyond the scope of this article but the balance of risks suggest to us that, at least for now, inflation could well prove to be higher and more persistent than many appreciate.
Most importantly this is an outcome that we believe is not currently being priced by markets, hence one that we feel comfortable in maintaining some exposure.
[1] https://www.bls.gov/news.release/empsit.nr0.htm
[2] https://www.nfib.com/foundations/research-center/monthly-reports/jobs-report/
[3] https://home.treasury.gov/news/featured-stories/fact-sheet-the-american-rescue-plan-will-deliver-immediate-economic-relief-to-families
[4] https://www.wsj.com/articles/the-other-reason-the-labor-force-is-shrunken-fear-of-covid-19-11618163017
[5] https://www.newyorkfed.org/microeconomics/sce/labor
[6] https://www.pewresearch.org/fact-tank/2021/02/10/unemployed-americans-are-feeling-the-emotional-strain-of-job-loss-most-have-considered-changing-occupations/
[7] https://hottingergroup.wpengine.com/february-investment-committee/
[8] https://www.bls.gov/news.release/cpi.nr0.htm
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
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