The Labor MarketSubmitted by Destination Wealth Management on October 26th, 2018
With unemployment at multi-decade lows, one might conclude this is all positive for the economy. However, while low unemployment is a positive, it does carry with it some risks that investors need to be aware of.
The inability to hire qualified workers dampens the ability of businesses to sell products and services. We are already seeing restaurants closing during nonpeak hours because there are simply not enough employees to staff the facility. It’s a common sight everywhere you go to see businesses advertising they are hiring and the competition is fierce to capture these workers.
Having less staff, and the resulting impact on sales, impacts the profitability of businesses and that is a negative for GDP growth. Considering the recent rise in interest rates, this impact is felt in a greater way as costs rise and sales are impacted by an insufficient available labor force. The impact an economic trickle has on an overall economic growth cannot be understated.
In addition to staffing challenges, a low unemployment rate tends to be a precursor to inflation pressure as wages often rise and prices are impacted as demand increases from a more fully employed population. More workers and more paychecks tend to increase demand on goods and services and that can drive prices up. Combined with rising interest rates, this suggests that inflation is a real possibility as the economy continues to heat up.
Remember, there are other factors that offset a tight labor market including the current trade dispute with China, higher borrowing costs for businesses and individuals, and a general economic uncertainty based on current politics. This offset does provide a dampening effect on inflationary pressure.
It is certainly more advantageous to have a low unemployment rate rather than a higher unemployment rate. But one should not discount the resulting impact of a tight labor market. The impact can have an effect on markets and it certainly can have an effect on portfolio strategies. We continue to monitor conditions to determine if any changes are necessary given conditions in the labor market as well as inflation.
If you have any questions about this information, do not hesitate to let us know. We are always here to help.