Labor Market Close to Full Employment, Inflation Continues to Rise

Labor Market

Last week, the U.S. Bureau of Labor Statistics released its labor market report for November. Let’s break down what the latest reading of this key economic barometer means for financial markets…

U.S. Labor Market: Disappointing (Only) at First Glance?

The number of new jobs created always gets the most attention in the data-rich monthly report. This time, the number was 210,000, but more than 500,000 were expected, so at first glance, the report was disappointing.

However, these numbers are heavily adjusted. For example, jobs are always cut in January. The holidays are over, so seasonal jobs are no longer necessary in the hospitality industry, for example. Typical winter weather leads to further job cuts in construction, etc. Such effects are factored out up front. So the numbers aren’t exactly precise.

Since the beginning of the COVID-19 crisis, statisticians have also tried to adjust for covid effects. This distorts the figures even further and in the end no one knows how many jobs were actually created.

When it Comes to Data, You Have to Go Deep

For this reason, many analysts (including myself) are now paying more attention to the less-adjusted part of the labor market report called the “household survey.” There, the jobs situation looks significantly better. According to this sub-report, significantly more new jobs have been created recently (namely, over one million!).

But I find another number even more important. 1.2 million people in the U.S. are currently looking for a full-time job, in comparison to 17 million people at the beginning of the COVID-19 crisis. That means the vast majority of people who were looking for a job after the crash now have one.

So even if the number of new jobs last month was disappointing, the employment situation is obviously much better than the headline figure suggests. The U.S. labor market is humming.

Source: https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm

U.S. Labor Market Close to Full Employment – Wage Inflation Coming

However, this is also bad news at the same time. Because this means that the labor market is very tight for companies. Companies are having a hard time finding workers. They have to entice them with higher wages, which drives up their costs, stoking inflation.

Until now, it could be argued that the strong inflation was due to supply bottlenecks, which would have to return to normal at some point. In the meantime, however, we have a real wage-price spiral that is mutually reinforcing. Inflation is thus becoming a permanent problem. And it will continue to increase.

It Becomes Dangerous When Politicians Gloss Over Inflation

Ridiculous comments by politicians will not change anything. U.S. President Joe Biden, for example, recently warned against exaggerated fears of high inflation. “The information that is being released about energy prices in November does not reflect reality,” Biden said, according to Reuters. 

The data also would not show expected price reductions in the coming months, he added. These data are by definition backward-looking, a presidential aide added, according to the report.

Consider how unscientific his argument is. He’s essentially saying the reading is too high, it can’t be right, and besides, it’s from the past and I do expect it to fall again. Let’s see if that will affect the inflation trend in the desired direction even in the slightest.

Prepare Your Portfolio

The whole situation is a good reason for you to think about the inflation protection of your investments. Equities are also increasingly at risk with inflation rates beyond 5%; companies are seeing profits plummet as they can no longer pass on their cost increases to consumers via prices.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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