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Happy Labor Day! Labor Day is the annual celebration of the social and economic achievements of American workers. The holiday is rooted in the late nineteenth century, when labor activists pushed for a federal holiday to recognize the many contributions workers have made to America’s strength, prosperity, and well-being. As American’s celebrate this weekend spending time with family and friends, we thought it would be a good time to recap what has happened in the labor market over the past several months.
The anecdotes of labor shortages since mid-2020 are still hanging around, but the trend this summer has been labor negotiations. UPS recently struck a deal with the Teamsters on labor contract negotiations. Starbucks and Amazon continue to navigate union interest from employees. Australian LNG (Liquified Natural Gas) workers threaten to strike over labor talks. The Massachusetts Bay Transportation Authority (MBTA) new labor contract has led to a 365% increase in bus operator applications in the month following the new wage increase. The September 14 deadline of the current UAW (United Auto Workers) labor contract with the Big Three automakers is approaching rapidly. The strength in the economy, labor shortages, low unemployment rate and high inflation have put pressure on companies to raise pay and benefits for workers. The chart below shows CPI inflation year-over-year (y/y) in the blue line and average hourly earnings year-over-year (y/y) in the red line and blue shade. While the most recent jobs report shows that wages (+4.3% y/y) are now growing faster than inflation (+3.2% y/y), the trend since March 2021 has been inflation significantly outpacing wage growth. This is where workers and unions are seeking a catch up in benefits.
The recent uptick in wages has also been driven by a tight labor market. The charts below show the unemployment rate going back 5 years. The large increase in unemployment during Covid has slowly worked its way back down to pre-covid levels and settled at 3.5% in August, before ticking higher to 3.8% in the September jobs report published this morning on an increase in the labor force participation rate.
Our next chart shows where the job additions are coming from in the nonfarm payroll report going back to late 2020. The strength at the beginning of the chart comes from the massive job losses we saw during Covid, but the total payroll figures surpassed the January 2020 peak in early 2022. The jobs added since then show growth in the total labor market. While the US labor market is dominated by the service sector (yellow and green bars), there has been solid growth in manufacturing, mining, lodging, and construction jobs as well. The job growth has been slowing but we are still adding nearly 200,000 jobs a month (seasonally adjusted).
With slower job growth we have also seen an uptick in initial claims for unemployment insurance. Two important data points stand out here. First, over the past year claims have started to rise off a low base. But when compared to the 5-year average of 245,000 from 2015 to 2020 the recent increase is within normal readings. Second, we notice a spike to 265,000 claims in early June which was likely a continuation of the technology sector layoffs starting at the end of 2022 with additional claims coming from the banking sector after the Silicon Valley Bank failure. But the recent declines may possibly be credited to the rise of Artificial Intelligence (AI) and AI investment spending which has slowed the technology sector layoffs and opened new job opportunities for those in the technology sector that are being laid off.
Overall, the labor market remains healthy with continued gains in wages and payroll totals. This remains the strength of the overall economy as nearly 70% of economic activity is consumer spending. The US consumer’s propensity to spend is unmatched around the globe and should remain healthy as long as consumers remain employed and see wage growth. This spending has reaccelerated GDP growth after falling for two consecutive quarters to start 2022 and pushed down the chance for recession in 2023. That being said, we know how quickly the labor market can turn (see the unemployment spike in early 2022) and trend changes in employment will likely steer the next direction of the economy.
We wish everyone a safe Holiday weekend!
The LVM Team