Yesterday, I wrote the line below to help articulate why the market trend will resume its upward position sooner rather than later.
- U.S. consumers grew more confident in the labor market last month, with younger workers in particular seeing a greater chance of finding work should they lose their current job.
The sentence reflects a sentiment, a feeling that things will get better. As it turns out, there is statistical data that specifically pinpoints the reason US consumer are feeling better about the labor market and, frankly, it is quite astounding
- Companies across the U.S. from Texas to Virginia and Nebraska are struggling to fill positions with metropolitan jobless rates below the 5.2 percent to 5.6 percent level the Federal Reserve regards as full employment nationally.
The above data comes from Moody’s Analytics, a highly respected economic-research firm. The article I read is filled with data, but my important takeaway is that jobs in 49 metropolitan areas are hard to fill, which means employers in those areas are inducing seducing, or otherwise luring job seekers with more benefits, and more money. In short, wages are rising in those areas.
- Competition for workers is prompting businesses to raise wages, increase hours for current employees, add benefits and recruit from other regions.
The above points to yet another sign that the US economy is about to realign with traditional growth models, which would mean growth on the order of 3-4% annually. A steady rate of growth in this zone, say two years, would lift the market well above its current levels. Companies will be making more money because of the statistic I just mentioned –competition for employees means more money for employees.
- Compensation has risen about 2 percent nationally so far this year and probably will increase by 2.2 percent next year, 2.5 percent in two years and 3 percent by late 2016
The above numbers are quite interesting relative to the US economy and the market. Annual rises in compensation speak to inflation, the kind of inflation the Fed takes very seriously, so seriously that it can inspire them to raise interest rates sooner rather than later.
You see, along with full employment, the other mandate that Fed has is to keep inflation in check and the key factor the Fed tracks regarding inflation is not the price of gas or bread; it is wages. Wages comprise some 70% of the inflationary metric.
Now, if the wages element of inflation is running 2-3 percent a year, this means inflation, as the Fed measures it, is running close to that number as well. Given that the Fed usually pins its inflation target right around this range, one might draw the conclusion that the Fed will raise interest rates when inflation consistently is in this zone. If Moody’s is correct, we are there, or almost there, given the additional reality of core inflation (Consumer Price Index) slightly rising, as well. The Fed is watching rest assured.
- The Fed’s Beige Book review of regional economic conditions has highlighted the pinch. Labor markets in the Minneapolis Fed district have tightened, with “strong demand for welders and health-care workers, such as certified nursing assistants,” and earnings at “high levels in the oil-drilling areas of North Dakota and Montana,” the Fed reported March 5.
The implications of rising interest rates for the market are many and unpredictable. Historically, though, the market does well in a higher interest rate environment, yet, every time the FOMC (the Fed) mentions raising rates, the talking heads and celebrity analysts freak out, as does the market. So, even though higher interest rates are good for everyone (yes, including home owners because they put a brake on an overheating market), the “ones in the know” tell us they are bad. True, higher rates means money costs more for banks and businesses and the likes of Goldman Sachs suffer in the carry trade, but just about everyone else wins.
It appears the market is moving upward today based on what? China’s economic growth sunk to an 18-month low (7.4% oh my), the earnings coming out are mixed, and Ukraine is tempting Russia to invade. Why is the market up?
The market is up because the smart money knows, in the end, the market likes a stronger economy and the fact that unemployment in major cities across the US is dropping fast and wages are rising to reflect the need of employers indicates the latest market correction is just that – a correction. Soon enough, Sisyphus will push the ball uphill again.
Trade in the day; Invest in your life …
