Jobs Are Getting Harder to Find

The domestic employment picture is worsening…

Earlier this week, first-quarter wage data heightened Wall Street’s inflation angst. The U.S. Bureau of Labor Statistics’ (“BLS”) employment cost index showed a gain of 1.2% compared to the fourth quarter’s 0.7% increase. The stock-market bears said this was the start of a new wage-price spiral that would drive the cost of goods higher.

However, when we go back and look at the historical data, increase in the first quarter are pretty common. Going back to 2014, the gain in first quarter wages has marked the high-water mark for seven of the last nine calendar years.

Another way we can look at this number is through the growth in hourly wages. The Federal Reserve Bank of Atlanta measures the numbers on a three-month moving average. By looking at the data over a long-term horizon, we can observe the bigger-picture trend…

As you can see, following the introduction of COVID stimulus in March 2021, worker pay took off. Supply-chain stress, rising demand for goods, and the lack of available laborers caused the year-over-year change in wage growth to shoot up from 3.2% in April 2021 to a peak of 6.7% in June 2022.

But now, as stimulus is fading and economic growth is returning toward normal, the gains in worker pay are slowing. According those same first-quarter numbers, annualized wage growth was at 4.7% in March compared to the 3.8% average going back to 1997.

Based on recent labor metrics, the demand for workers is steadily fading. If that trend keeps up, it should mean a rising pool of available labor. That should mean companies won’t have to pay as much to fill vacant jobs. The shift should reduce upside pressure on inflation growth moving forward, supporting a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Right now, we’re in the throws of monthly labor metrics. The numbers are important because they’re an indicator of future economic strength. If it’s easy for people to find work, than that means they have money in their pockets to spend. And if it’s harder to find a job, well hard-earned dollars become more precious. But the change up or down drives demand for goods and prices.

Yesterday, we received our first monthly total for April. Payroll processor Automatic Data Processing released its nonfarm payroll numbers. According to the result, the economy added 192,000 jobs…

While that was higher than the expectation for 179,000, we need to think about it from a long-term perspective. In March, ADP said 208,000 new employees were added to company payrolls. That means the monthly average so far this year is 162,700. That compares to the 2022 and 2023 averages of 306,000 and 215,000, respectively. And not one month this year has exceeded the 12-month average of 201,000.

Looking at the chart above, we get a more concrete sense of the trend. On the far left, we can see that the economy added more than 820,000 jobs in December 2021. And, while there have been plenty of peaks and valleys between then and now, one thing has remained constant… the rate of hiring keeps falling.

To get a better idea of what the real-time numbers look like, we can look at recent manufacturing surveys from regional Federal Reserve banks. The Dallas, Kansas City, Philadelphia, and New York Feds produce separate indexes every month. The numbers can be telling because those regions represent roughly 25% of national economic output.

According to their April surveys, the outlook for hiring hasn’t been this week since the pandemic crash in 2021…

The Philly survey showed hiring remained in contraction mode for the 12th month in the last 14. It elaborated that the number of firms firing exceeded those who were hiring by a three-to-one margin. And the Kansas City survey noted the availability of workers has improved compared to a couple of years ago.

But it isn’t just the pace of hiring that’s falling. So are the number of hours being worked…

The Dallas survey said the number of hours being worked contracted for the seventh consecutive month. The Philadelphia report showed workers’ hours dropped to the lowest level since April 2020, when economic activity was shut down. And the New York results showed companies anticipate the future need for hours worked to slide even more.

Further confirming this shift was yesterday’s Job Openings and Labor Turnover Survey…

According to the BLS result, the number of openings fell to 8.5 million in March. That compares to the 8.8 million total from February and the 12 million peak in March 2022. In fact, the number hasn’t been this low since March 2021, right as economic growth was exploding higher.

But there’s one clear trend that stands out…

Based on all of the numbers we just looked at, there’s a pattern that is repeating across the board. After peaking in late 2021/early 2022, all of the metrics are steadily moving lower. Now, they may not be dropping as quickly as some investors and economists may have hoped, but they’re falling, nonetheless.

Now, it’s possible that wage pressure could keep building. After all, who doesn’t want to make more money? I know I’m always in that camp. But considering what we’re seeing that trend isn’t likely to last. As worker supply keeps going up and the number of job openings falls, the trends in pay are going to change.

As companies find it easier to fill jobs, that means they’ll have to pay less to keep them. As wages start to fall, it means the cost of producing goods will go down. And eventually, as the cycle plays out, it will ease the upward pressure on inflation.

As that happens, investors will feel increasingly confident the central bank won’t start raising interest rates once more, boosting the long-term outlook for the S&P 500.

Five Stories Moving the Market:

The Federal Reserve held interest rates steady at their highest level in two decades and acknowledged recent inflation setbacks, extending a wait-and-see posture that could last well into the year – WSJ. (Why you should care – expectations for rate cuts this year have further dwindled to just one by December)

The Federal Reserve announced plans to slow the speed of its balance sheet drawdown; the central bank said that starting on June 1 it was reducing the cap on Treasury securities it allows to mature and not be replaced to $25 billion from its current cap of up to $60 billion per month – Reuters. (Why you should care – the shift means it will start buying an additional $35 billion worth of Treasurys each month, potentially weighing on interest rates)

The U.S. Treasury Department announced the start date for its first debt buyback program in more than two decades; the Treasury plans weekly buybacks of up to $2 billion of nominal coupon securities, and up to $500 million for Treasury inflation-protected securities beginning in June through the end of July – Bloomberg. (Why you should care - $10 billion worth of Treasury buybacks per month should boost financial-market liquidity and ease rates)

Qualcomm forecast quarterly sales and adjusted profit above Wall Street expectations, driven by selling more and pricier chips into Android smartphones with artificial-intelligence features – Reuters. (Why you should care – the better-than-expected numbers and guidance could help to stem the recent drop in semiconductor stocks)

A late yen surge in New York fueled speculation Japanese authorities intervened for a second time this week, before the currency began to weaken again in Tokyo trading, paring much of the move – Bloomberg. (Why you should care – Japanese government intervention in the recent past has typically been a sign of a trough in yen weakness)

Economic Calendar:

Chinese Markets Closed for Labor Day

BOJ Meeting Minutes

BOC’s Macklem (Governor) Speaks (12:45 a.m.)

Eurozone – HCOB Eurozone Manufacturing PMI (Final) for April (4 a.m.)

Initial Jobless Claims (8:30 a.m.)

Continuing Claims (8:30 a.m.)

Unit Labor Costs (Preliminary) for 1Q (8:30 a.m.)

Factory Orders for March (10 a.m.)

Energy Information Administration Weekly Petroleum Inventories (10:30 a.m.)

ECB’s Lane (Chief Economist) Speaks (4:15 p.m.)

Fed's Balance Sheet Update?(4:30 p.m.)