Why Aren’t You Working?

As investors continued to guess the Fed’s taper schedule, keen eyes were on the job data. Unfortunately, Friday’s job report was a disappointment for many who expect a more robust figure given the exit of many unemployment benefits.

A Tight Labor Market

The data reflects a strain in the labour market. We saw a sharp drop in the unemployment rate of 4.8% from 5.2% in the prior period. There is also a considerable increase in the workweek, rising from 34.6 hours to 34.8 hours. It is also encouraging to see the average hourly earnings growth hitting 4.6% compared to a year ago.

The results were primarily a result of 183,000 leaving the workforce. Also, the labour-force participation had slipped slightly to 61.6% from 61.7% for the working-age population compared to the prior period. Beneath this worrying sign is research showing that firms are finding it tough to find qualified applicants to fill job openings. This is consistent with the recent Jobs Openings and Labor Turnover Survey, which indicated 1.43 jobs openings for each unemployed person.

Labor Supply and Wages

Pika World sees the labour supply issue as a more severe concern than a demand-side matter. The lack of workers returning to work in September is troubling. Employers had to raise wages to retain and attract new staff. As a result, the average hourly earnings rose 0.6% in September, which has been upward since April.

The Wild Card Plays Out

Covid-19 persists in having dampened effects on labour recovery as it deters Americans willingness to search for jobs. This is in contrast to Canada, which has seen its employment level return to the prepandemic in September as 82% of the population is fully vaccinated.

Indeed, according to a report by Bank of America economists, there were about 1.6 million Americans who conveyed that they were not actively looking for jobs for the past four weeks due to the pandemic situation. In addition, the child-care arrangement issue and transportation problems further act as barriers for parents to return to the labour force.

Doubts on Fed’s Next Action

As Fed’s tapering schedule is dependent on the health of the labour market, the slower hiring figure in September has cast doubts on the Fed’s capacity to normalise monetary policy in the next FOMC meeting in early Nov.

Despite this backdrop, Pika World believes the Fed has sufficient ammunition to reduce its monthly bond purchase program. When considering the revisions and the private payroll segment, the Fed has a good vibe to stick to its taper projection.

The revisions for the past two months’ data reflects an additional 169,000 workers returning to work. Likewise, last month payroll data dismal performance is due primarily to the drop of 180,000 education workers who had risen by more than a million after being seasonally adjusted to take effect on the start of the school season.

The Dark Clouds Remain

With some evidence of slowing economic activity and the worsening labour shortage that put the pedal on wage increase, the Fed is in a challenging position to communicate its outlook and plans ahead for the next few months.

It does not help that unemployment has fallen for the wrong reason. Although the 4.8% unemployment rate is the lowest level since March 2020 and below the consensus of 5.1%, the surprise weakening of labour force participation means that part of the drop in unemployment rate is artificially showing up in the better unemployment rate masking the deteriorating labour condition.

In short, Pika World believes that the unemployment rate has fallen for the wrong reasons. We maintain cautious optimism on the US equities market. Our daily updates have shown some directions of our preferred US counters and shift to the European market for friends of Pika World. In addition, our positions in financials have continued to help us see gains for September and October despite the volatile market. This applies to our call to maintain defensive counters in one’s portfolio.

As we move towards the last quarter of the year, Pika World may shift the narrative for the mid-cycle transition to a late-stage mature recovery phase when more indicators surface such a trend. Till then, we will share more insights and support our reasonings yet again on our stocks composition.

Although personal financial health is the prime call of Pika World Learners Banks, we believe that ultimate wealth is the realisation of money and meaning with a healthy body.

On that note, Pika World wishes you excellent health and a re-charging week.