The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveens 2021 Fourth-Quarter Outlook:
- U.S. economy: Stimulus wearing off but growth remains solid. More workers needed.
- Global economy: Slowing from its fastest pace in decades even as parts of Asia and the emerging markets are set to reopen.
- Policy watch: Policy is shifting from “extremely accommodative” to merely “quite accommodative.”
- Fixed income: Income generation remains a challenge as rates rise gently from very low levels.
- Equities: Valuations have come down but remain high relative to history; earnings growth will be key to returns.
- Asset allocation: Balance the risk of hotter inflation with that of slower growth.
Quote of the week:
“Perpetual optimism is a force multiplier.” – Colin Powell
There are jobs aplenty, but not nearly enough folks want them
U.S. incomes have risen significantly during the pandemic, driven in large part by the periodic influxes of government stimulus people have received in their bank accounts. Workers’ wages and salaries have also contributed to the rise, independent of federal relief. All of this has supported real spending growth (i.e., spending growth adjusted for inflation) and boosted personal savings rates.
But with income support from Washington now largely tapped out and sharply higher energy, food and housing costs helping to push inflation up to decades-high levels, some people may find they’re struggling to make ends meet.
How are working Americans responding to this trend? Remarkably, they’re quitting their jobs. In August, more than 3% of workers voluntarily said “so long” to their employers. That’s the highest “quits” rate since 2000.5
Job separations are a natural part of the economy, but employer-initiated separations (i.e., layoffs) are rare right now. Indeed, businesses are scrambling to find and retain workers, with more than 10 million job openings left unfilled in August.6 This is a clear case of demand far outstripping supply.
In a tight labor market where workers hold the cards, a high quits rate is to be expected. At the same time, though, we’d also anticipate a rising labor force participation rate (LFPR) and strong net job creation. But neither of these has materialized — at least not yet. The LFPR hasn’t budged in almost a year, while employers added a relatively weak 560,000 payrolls in August and September combined.7
So where are these “quitters” going? Not necessarily into new, higher-paying roles. Instead, many have left the workforce altogether.
This phenomenon is being called the “Great Resignation,” and it’s been driven by three separate trends:
- Thanks to a 19-month equity bull market, a lot of people in their 50s and above have the financial means — and the desire — to retire early.
- Many who haven’t retired but lost their jobs early in the pandemic have been able to get by thanks to government stimulus.
- The disruption and fear caused by the pandemic itself is likely still keeping would-be employees on the sidelines.
In light of not only the worker shortage but also the ongoing inadequacy of global goods production to meet sky-high demand, it’s worth asking whether the last round of U.S. fiscal stimulus passed in March — or at least its massive scope and the non-targeted nature of the spending — might have been a policy error. Of course, the answer very much depends on one’s perspective.
Small businesses already challenged by rising input costs due to inflation and now facing the prospect of having to pay higher wages to fill open positions may be inclined to believe Congress overdid it. On the other hand, folks on the receiving end of the stimulus, including those unable to seek employment or working in low-paying jobs, benefited greatly. In our view, balancing the priorities of these various actors is more of a moral and political question than an economic one.
So where does that leave the economy and financial markets? In a hurry-up-and-wait mode, unfortunately. Until unleashed pent-up consumer demand normalizes and (presumably) more people decide to rejoin the workforce, gauging how different the economy will look post-pandemic will remain a challenge. This absence of clarity will likely leave markets uncertain about the strength and length of the current business cycle, leading to wobbly equity market leadership (despite very good corporate earnings) and only a modest rise in long-term interest rates heading into 2022.
A notable slowdown in GDP growth is likely but not a cause for alarm
The advance estimate of third-quarter U.S. GDP growth will be released on Thursday, and the economy’s rate of expansion is expected to show a significant drop from the 6%+ (annualized) pace it logged in the first half of the year.
How much of a drop? The closely watched Atlanta Fed GDPNow tracker — which in the past has generally proven reliable — currently estimates third-quarter growth of just 0.5%. Let’s assume that paltry figure (or one close to it) is correct. What might explain the abrupt slowdown and the big discrepancy relative to the tracking model’s 6.1% estimate in late July?8
- Although personal consumption has remained at high levels, its rate of growth has slowed considerably after surging in the first two quarters of 2021 — and it’s the growth rate that factors into the quarterly GDP calculation.
- Falling auto sales in July and August were among the causes of the deceleration in spending growth, due mainly to (a) the lack of new stimulus payments that likely allowed consumers to buy more cars and other durable goods in the first half of the year, and (b) supply chain disruptions that hamstrung the production and delivery of semiconductors, which are needed to build new vehicles. Investment was expected to be a major contributor to GDP growth in the third quarter, but construction hasn’t been as strong as anticipated, and business spending on equipment and intellectual property (like software) probably didn’t increase enough to make up the difference. We also doubt that inventory growth — items produced but not sold — will be as large a contributor as we believed back in July, simply because demand continues to outpace supply, leaving shelves empty.
- Trade will likely remain a drag as well. Consumer spending on imports continued to rise during the quarter, but export growth failed to keep up. (Imports count against GDP, while exports add to it.)
- As in the second quarter, government spending was probably of little help; most of the fiscal stimulus money was spent before the end of the first quarter.
While disappointing, flattish third-quarter GDP growth wouldn’t be a harbinger of doom for the U.S. economy. Here’s why:
- We expect pent-up demand and inadequate supply in a number of sectors should be resolved in the next several quarters, when consumer spending growth will appear in the GDP data.
- A pickup in business investment is also likely coming, as is stronger residential construction amid steeply climbing home prices.
- Trade should exert less of a drag as exports rise against a backdrop of slightly faster economic growth outside the U.S. Also, travel and tourism are poised to increase.
In terms of government spending, we doubt the spending bills being debated in Congress will have much impact on GDP growth one way or the other.