The Markets & the Economy - What We’re Watching - September 2021

Top Theme of the Month:

  • The job market dislocation creates uncertainty

The recent jobs market report continues to highlight a slower path of recovery and is an interesting topic to watch – what is the truth behind the job recovery and the issues surrounding the notion of proper full employment? With the unofficial end to the summer upon us and children already back to school, we wonder whether the elements are in place for continued job recovery given the current record job openings. The recent August 27th non-farm payrolls report, reported that the economy added only 235,000 jobs vs the 720,000 expected. This report was a reminder that the employment growth is facing headwinds likely amid worries that a rise in the Delta variant of Covid-19 cases, as well as with potential mounting structural issues,  as seen in the chart below.1 This dislocation may have an impact on the economy and corporate profits. Fed officials continue to watch the jobs numbers closely for clues as to whether they should start easing back some of the policy help, such as their substantial monthly bond-buying program, that they have been providing since the pandemic started. The Fed meets next week where more information may be revealed on the timeframe of their tapering.

S&P 500 earnings per share

The US Gross Domestic Product (GDP) has recovered beyond pre-pandemic levels, but with over 5 million fewer people employed, a number well below pre-Covid levels. Despite this, we are seeing a record amount of job openings2, which is leading to pressures for businesses. The Labor Department reported on September 8th that employers posted 10.9 million job openings in July, which is the most on records dating back to 2000.3 Some reasons the pace of the employment recovery has slowed could be attributed to government stimulus, continued concerns around Covid-19, and/or people disengaging from the workforce all together. This includes a new phenomenon of “quit”/”resign” culture for those seeking a new balance and quality of life.

percent change in S&P 500 earnings and valuations

Could these matters we have identified be masking a hidden structural issue in the job market that could result in more sustained wage pressure? Possibly, and it’s something we will continue to monitor. In addition, there continues to be an underlying concern around a misalignment between the jobs available and the skill sets needed to execute these jobs, which may be exacerbating the labor situation. Up until now, corporate America, and to a much lesser degree small business employers, have been able to “make do” without the necessary help. They have done so through additional productivity measures or finding efficiencies in performing similar business activities in a reduced time frame.

We continue to watch how this issue may impact future economic growth and corporate profits, both of which are vital determinants in how the market is valued. There may be a time coming soon where the rubber meets the road and businesses have to consider their options which could include offering materially higher wages, providing benefits (and flexibility) to lure employees back, raising prices on goods and services to a point where demand might be diminished, or surrendering to lost sales opportunities through a lack of resources.

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1 Chart Source: Strategas Research

2 U.S Bureau of Labor Statistics

3 Chart Source: Strategas Research

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