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Wage Growth Rates Are Stuck – Is This Good or Bad for Markets?

CAMS Weekly View from the Corner – Week ending 7/6/2018

July 9, 2018

This past Friday the Bureau of Labor Statistics (BLS) released the U.S. monthly employment results for June.  The number of new jobs created came in at 213,000 which was higher than expected.

The June employment report continued the theme of a strong employment market as well as respectable wage growth rates in the upper 2% range.

The problem is inflation is running just below that range.  This has left the difference between the two marginally positive which has been a long-standing issue in the U.S. in particular since 2000.

With the tremendous demand for employees most expect to see these wage growth rates pushing higher.  What gives?

FRED - Not In Labor Force - 7.9.18

Within the monthly employment report there is a category called “Not in Labor Force.”  People are included in this category if they do not have a job and are not currently seeking a job.

There are numerous discussion points around this category but we will stay on-point here and use it to help us understand, in part, why wage growth rates are improving but not as quickly as many would expect in light of the strong employment backdrop.

Think pent up supply of workers relative to demand for workers

The above chart dates back to the mid-1970’s for historical perspective.  It is simply taking the number of workers in the Not in Labor Force category and showing it as a percentage of the number of people in the “Working Age Category – ages 15-64.”

Obviously, in the last 15 years-plus the amount of people (and the tenacity of the trend) in the working age category that are not working has become epic compared to the history of this 40-plus year chart.

Keeping it simple, the above tells us that nearly half (46.5%) of the working age category are not working nor are they looking for work.

All told, this represents a tremendous amount of supply of workers.  As they come back into the Labor Force this plays a role into “taming” the upward trend of wage growth rates.

Interestingly, through this lens the June report reflected 600,000 new entrants into the Labor Force by way of seeking a job or having found a job.

That number reflects the untapped employee pool and if this continues will play a role in keeping wage growth rates from spiking higher.

A spike higher could cause an inflation and interest rate scare that would certainly play out negatively in markets.  Conversely, a gradual trend higher would be optimal in various markets.  Per the above, gradual may be the most likely experience near-term.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


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This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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