US jobs data is stirring debate among investors over whether the labor market has suffered permanent scars linked to the pandemic
The September non-farm payrolls report raises questions in the minds of some investors about whether the US labor market has suffered lasting pandemic-related scars that could keep inflation consistently higher, which could force market participants and policy makers to readjust their expectations.
The so-called labor force participation rate, or the proportion of people of working age who have or are looking for a job, was little changed at 61.6% last month — indicating that millions of Americans remain marginalized. The rate has remained within a narrow range since June last year despite the reopening of the economy, and is 1.7 percentage points lower than it was in February 2020 as the pandemic spread to the United States.
This is significant because unemployment benefits for millions of Americans expired last month, an event that is still not enough to get many people back into the workforce. Meanwhile, average hourly earnings rose during September as companies struggled to attract people from the sidelines. Investors say rising wages is one reason inflation has continued to rise for longer, with financial markets and policy makers forcing to rethink their economic outlook and expectations for policy rates.
“Without a doubt, labor markets have been scarred, but the level of permanent scars has yet to show,” said Matt Biden, investment manager at American Beacon Advisors in Irving, Texas. “On average, labor is a large part of a company’s overall cost structure, so the wage increase is more likely to be passed on to the consumer to maintain margins — which is inflationary.”
“The Fed will have to monitor the situation closely because wage inflation tends to be more permanent than temporary,” Biden, whose company managed $75.2 billion in assets as of June, wrote in an email to MarketWatch. Depending on the level of wage inflation, it could put more pressure on their ‘less for longer’ strategy on interest rates.
Financial markets struggled to explain Friday jobs report, which reflected a much weaker-than-expected 194,000 new job creation, but saw a drop in the unemployment rate to 4.8% and an increase in salary revisions for the previous months that gave investors at least some hope. Shortly after the September non-farm payrolls report was released early on Friday, markets fell, with US stock indices, bond futures, and the US dollar index falling.
All this is wandering about in choppy trade.
“The market and the Federal Reserve are adjusting to higher inflation and the workforce is struggling to find a foothold from here,” Rob Daly, director of fixed income at Glenmede Investment Management, said by phone. “I don’t think we have an informative post from the past on how to resolve this by itself nowadays, but these structural changes are going to last longer, for sure.”
“While the number of key jobs wasn’t great, the reviews were pretty good,” said Daly, who oversees $4.5 billion from Philadelphia. However, “there are some structural changes afoot, and it will take longer to get people back into the work force.”
Major stock averages closed slightly lower, with the Dow Jones Industrial Average
The S&P 500 fell less than 0.1%.
The Nasdaq Composite Index fell 0.2%.
0.5% less. The dollar index fell 0.1%, while Treasury yields rose.
Glenmede’s Daley says part of the reason for the high 10-year treasury rate
Above 1.6% on Friday, along with a sharp rise in the 2- to 10-year spread, was due to investors pricing in a “more permanent inflation boost in bond yields”.
In a note released just before Friday’s jobs report, Vicki Redwood, chief economic adviser to London-based Capital Economics, said that in the year since the pandemic began, “the most pressing question has been about the lasting scars of the economy.”
“The only way we were very optimistic, at least in the United States, was in anticipating that the labor supply would emerge unscathed,” she wrote. “Although much of the decline in the workforce appears to be due to temporary factors (for example, due to virus concerns), some reflect an increase in early retirees who are unlikely to be tempted to return to work.”