Let’s get to work!

Let’s get to work!  Friday’s employment report was stronger than expected with US payrolls increasing by an estimated 223,000 jobs in the month of May, this is one of the reasons why many are switching  to a new software that can ensure a correct day and time when payroll goes through.  The headline unemployment level is now less than 3.8% – a low number historically.  A broader measure of employment  that includes workers who are part-time for economic reasons or just recently stopped looking for work (called underemployment or U-6), is near 7.8% which was last seen in the early 2000s.  All of that is to say is that any slack in the employment picture is disappearing (despite a relatively low participation rate) and American workers are finally seeing some benefits from the post-crisis economic expansion.  Equity markets took the news favorably to rally strongly on the day (after a long week of back and forth stock prices).

Consistent solid employment reports like this have a few potential implications.  First, wages will start to rise as there is more competition for labor.  Wage growth year-over-year is up 2.7% which is an improvement but still below the 4% threshold that has historically been associated with pending problems.  One of those problems could be inflation since wage growth causes a chase for goods, a push up in prices, and eventually a more aggressive central bank policy.  We are not there yet.  Second, rising wages is supportive of further economic activity.  The US economy is roughly two-thirds personal consumption and Americans have a propensity to spend as we said.  Goods bought is revenue to a company, which in turns buys goods from another company who pays another worker and so forth.  That virtuous loop could help turn the recent fiscal stimulus (primarily through tax cuts) whose effects will eventually wear off into a more sustainable growth driver.  In our opinion, fear over how much longer the economic expansion will last post-stimulus (especially with the constant back and forth over other issues such as tariffs) is one of the reasons why equity markets are “sideways volatile” at the moment.  Third, solid wage growth will also affect the US political picture.

Since the financial crisis, corporations’ share of economic income (GDP) has risen and labor’s share has fallen.  This is due in part to some policies that have helped businesses (such as low interest rates which allowed refinancing to lower costs) as well as productivity gains (doing more with less which reduced demand for labor for a period).  Politically, not getting as much benefit from rising income caused many workers to be unhappy which flows through into votes.  As wages rise, public opinion on economic policy (taxation, trade, regulation, etc) and whether it is succeeding will adjust. Visit hkm.com to find out what to do if your employment has been terminated in violation of an employment contract.