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Good morning. I’m Jenn Hughes, filling in while Rob is on vacation. US mortgage rates have been above 7% for four weeks now, marking only the third such occurrence this century. Despite this, new home loan applications have increased for the first time since July. Is this a sign of desperation or simply acceptance of the new normal? Feel free to email me at [email protected].
Unhedged will be on break for Labor Day. We’ll be back on Tuesday. In the meantime, why not listen to Ethan and Robin Wigglesworth discuss two widely circulated papers from Jackson Hole on the Unhedged podcast?
Putting in the work
The data calendar has made this week “Jobs Week” for US markets, coinciding with the annual Labor Day holiday.
This week, government data has shown a decrease in job openings in July, and the monthly ADP private payrolls report has also been soft. The quits rate has returned to 2019 levels. The highly anticipated non-farm payrolls numbers, scheduled to be released on Friday, are expected to show a more moderate increase of 170,000 jobs in August.
Stocks and bonds have responded positively to the data. Ten-year Treasury yields dropped to their lowest point in over two weeks on Wednesday at 4.1%. The gradual easing of tight labor markets is good news for the Federal Reserve’s efforts to combat inflation and has increased investor hopes of a soft landing. The S&P 500 has gained 2.5% since Monday, fueled by optimism that weaker data will lead to interest rate cuts. If the index maintains its current level, it will be the best week since mid-June.
Investors are betting that interest rates will remain unchanged, with only a slight chance of another increase. The probability of rates staying the same by year-end is close to 50%, while the chance of another increase is represented by the pink line in the chart. This uncertainty brings us back to the labor market and the data that Jay Powell mentioned as the guiding stars for the Fed’s decision-making. This week’s data indicates a trend of moderating but still healthy job growth. However, there is a concern that the labor market has undergone structural changes that are not reflected in the data.
Michael Arone, chief investment strategist at State Street Global Advisors, has identified five reasons to believe that there are deeper changes in the labor market. These include a decrease in female labor force participation, a decline in foreign-born workers, the rapid retirement of baby boomers, small businesses’ struggles to find skilled labor, and the rise of the gig economy. Arone highlights baby boomers and small businesses as the most significant issues.
The early retirement of baby boomers means a loss of experienced and skilled workers, resulting in a reduced labor supply. Additionally, small businesses are typically the driving force behind job growth, and their difficulties in finding qualified workers raises concerns about future labor growth. The other issues mentioned are more demographic or could be addressed through policy measures.
Surveys conducted by the National Federation of Independent Business show that 42% of their members had at least one unfilled position in July, a level that is usually associated with recessions. These historically high levels suggest that there may be underlying issues affecting hiring beyond the usual cyclical patterns. This could be indicative of a structural problem in the labor market.
As for the retirement plans of baby boomers, current data is limited. Government figures indicate that older individuals are expected to continue working, albeit at a lower participation rate due to an aging workforce. However, the chart shows that there has been no significant increase in labor force participation among older groups from 2011 to 2021, even though more individuals are expected to remain in the workforce by 2031.
The Bureau of Labor Statistics release does not provide an explanation for its belief that boomers will continue working. A study by the Pew Research Center in late 2021 indicated that the number of retirees aged 55 and over actually increased after 2019, the first such increase in over 20 years. The number of retirees over 55 was growing by about 1 million a year in 2019. During the pandemic in 2020 and 2021, that number rose to 3.5 million a year. This could suggest structural changes or be attributed to favorable economic conditions and the desire to retire in desirable locations. However, a downturn could force some individuals to postpone their retirement plans.
In the post-pandemic world, workers have shown that lifestyle choices can override economic considerations. This is evident in the reluctance of workers to return to the office full-time. The potential for underestimating structural changes in the labor market has implications for monetary policy. Overly optimistic data, such as a low unemployment rate, could lead the Federal Reserve to maintain higher interest rates for longer than the underlying economy can sustain. Alternatively, a strong job market could fuel wage inflation and make it more challenging for the Fed to control inflation.
Federal Reserve Chair Jay Powell recently stated that inflation remains too high and that they are prepared to raise rates further if necessary. The Fed intends to keep policy restrictive until they are confident that inflation is moving sustainably towards their target. The market’s response to the data indicates a hope that the Fed will take a more accommodative approach.
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