June employment figures show that the shortage of workers for available jobs is acute, which will force employers to boost pay and incentives to attract talent, which in turn, will increase the price of goods and services.
CNBC calls the shortage “epidemic”. Citing the latest report by ADP/Moody’s, author Jeff Cox says that although certain industries are facing particularly pointed difficulties, such as trucking and silicone chip firms, the shortage is spread far and wide across the American economy.
Private payroll additions had been pacing above 200,000 for four months, but now have fallen 20,000 short of that benchmark also for four months. The shortfall is not because of a lack of available positions, rather it is because of the lack of workers to fill them. Cox says:
“Economists expect that employers are going to have to start doing more to entice workers, likely through pay raises, training and other incentives.”
“Business’ number one problem is finding qualified workers. At the current pace of job growth, if sustained, this problem is set to get much worse,” Mark Zandi, chief economist at Moody’s Analytics, said in a statement. “These labor shortages will only intensify across all industries and company sizes.”
The article cites Bureau of Labor Statistics figures showing that there were 6.7 million job openings nationwide and 6 million people classified as unemployed.
Businesses are reporting record profits, but if labor shortages continue, profits will be trimmed by rising labor costs until corporations can pass those costs to consumers.
Contributing to rising inflation
Jerry has been saying for months that the labor shortage was going to pinch the economy, forcing employers to increase wages and that those cost increases will be passed to consumers. It is happening now, in earnest.
True inflation is caused by mismanaged monetary policy by governments and central banks. The core inflation problem in an economy is based on money supply mishandling. Additional factors such as the current labor shortage pushing wages upward tacks on an exacerbating factor. Another element is the rising cost of oil. Every good gets shipped to market via fossil-fueled vehicles and as fuel prices rise, that cost increase will also be added into the price of goods.
In response the Federal Reserve has historically raised interest rates in an effort to quell rising inflation. Currently inflation is at 2 percent which is in line with the Fed goal. But because of rising labor and fuel prices, the Fed will continue to raise interest rates in an effort to keep inflation from getting away.
As Jerry has forcefully noted, the Fed has a history of stomping too hard on the interest rate brakes, throwing the investment markets into bear country and causing a recession thereafter.
The economy has “bumped against the proverbial labor wall,” David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his morning note Thursday. “Inflation pressures will intensify and the Fed will be forced to act more aggressively, just as has been the case in the past. There is no Presidential Tweet that will stop Mother Nature from taking its course.”
Preparing for the market to turn down
At Cornerstone Financial Services, we believe that the equity markets are exhibiting the choppy sideways motion consistent with a top, which at some point, probably in 2019, will break to the downside. There may be some triggering event, perhaps related to the ongoing trade and tariff spat President Trump has with China and our European allies.
With interest rates rising the bond market is already headed downward. Fixed income investments are already declining in value.
Jerry believes that the bear market ahead will be very tough and that a subsequent recession will be not quite as bad, at least in the U.S.
Additionally, following on Alan Greenspan’s prediction of a return to 1970s-style stagflation, Jerry urges people at or near retirement to have their portfolios reviewed. American investors have not dealt with an inflationary environment in nearly 40 years and it is almost certain your portfolio is not positioned to weather that storm.
Finally, again for those on the cusp of retirement, another steep stock market decline taking a big bite out of your retirement savings must be avoided at all costs. The 2008-09 meltdown took years from which to recover. Don’t go through that again.
Don’t wait; schedule a complimentary portfolio review today.
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