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Jobs Growth, Inflation, and Stagflation

On September 3, 2021, the U.S. Department of Labor released the non-farm payroll employment for August. The widely followed non-farm payroll employment rose by 235,000. The unemployment rate declined by 0.2% to 5.2%. This figure was far below the monthly job growth average of 586,000. During August, job gains occurred in professional and business services, transportation, warehousing, private education, and manufacturing. Notable declines occurred in retail trade.

The unemployment rate fell to 5.2%, and the number of unemployed declined to 8.4 million, following a sharp drop in July. Both figures are down sharply from their peaks at the end of the Feb-Apr 2020 pandemic-induced recession. However, they remain far above the levels before the COVID-19 pandemic in February 2020, with a 3.5% unemployment rate, and 5.7 million unemployed.

The jobs market continues to grow this past year but at a slower pace, with many more companies forced to pay higher wages to attract new employees. Walmart Inc. (WMT), one of the largest retailers, has announced an increase in its average minimum wage to $16 an hour. Earlier in the year, another large retailer, Costco Wholesale Corp (COST), raised the starting hourly wage to $16 an hour. Other companies have followed suit with higher salaries and up-front signing bonuses to attract workers. The average hourly earnings of all employees (private) have steadily risen to an all-time high of $30.73 per hour as of August 2021.


The sharp jump in wages suggests companies continue to struggle to entice workers to return. The question then becomes - are workers not returning to work because of the uncertainties surrounding the Delta variant, or is there something else? Since many state and federal unemployment benefits will soon expire, it will be interesting if more workers will return to the workforce, or have they found an alternative way to earn money?


Since the pandemic, structural forces are developing in the workplace. Some believe these trends are sustainable and longer-lasting. For instance, in the past year, the migration of people moving from densely populated large cities to suburbs and smaller cities has accelerated. The migration has led to a housing boom and escalating home prices in various parts of the country. Another equally important trend is the stay-at-home and work-from-home theme. Yet another structural trend is people moving back home to live with mom and dad and sharing apartments with friends and other relatives.


Will the above trends sustain and force companies to pay even higher wages and benefits to attract labor?


Is the current lack of workers the direct result of the extended unemployment benefits that may be keeping workers home and away from work? When the benefits expire, will there be a pickup in new jobs in the future employment reports? Also, it will be interesting when the benefits expire, will people that make money through day trading and crypto mining return to their full-time jobs?


It is difficult to know the reasons for the slowing job growth trend. It may be a combination of various factors. However, if job growth fails to increase, it can adversely impact the economy and the U.S. stock market.


One final point worth mentioning, if inflation begins to take hold and increase dramatically, the combination of slower job growth, a weaker economy, and increased inflation can ignite the next stagflation cycle.


The last time U.S. experienced stagflation was from 1973-1982. Stagflation is the result of nominal economic growth plus high inflation and slow job growth/high unemployment. In the prior cycle, tightening monetary policies and expansionary fiscal policies ignited the stagflation cycle. If the FED makes the mistake of tightening too soon and the government expands too aggressively, will this lead to the next stagflation cycle?


Source: Courtesy of Federal Reserve Bank of St. Louis (FRED) and the U.S. Bureau of Labor Statistics

Source: Courtesy of Federal Reserve Bank of St. Louis (FRED) and the U.S. Bureau of Labor Statistics

Source: Courtesy of Federal Reserve Bank of St. Louis (FRED) and the U.S. Bureau of Labor Statistics

Source: Courtesy of Federal Reserve Bank of St. Louis (FRED) and the U.S. Bureau of Labor Statistics

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