The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen's 2021 Q2 Outlook
- U.S. economy: A strong economic backdrop bodes well for U.S. economic growth.
- Global economy: Should surge as large developed countries sprint into the post-pandemic world.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: Take more risk in credit-sensitive parts of the market.
- Equities: Bullish on cyclicals but looking for opportunities again in growth.
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“Nothing ever goes back to normal. All that happens is your concept of normal changes.” – Allison Van Diepen
Is the U.S. labor market already tight? That may depend on … teenagers?
The recently released NFIB Small Business Optimism Index for March highlighted a familiar problem currently facing business owners: finding qualified workers to fill jobs.5 It’s not clear to what extent this may be due to the latest federal pandemic relief package, the American Rescue Plan Act (ARPA), which President Biden signed last month. ARPA extends the existing supplemental $300/week unemployment benefit through September 6. An unintended potential consequence of these additional payments is that some people, especially low earners, may be making more money by staying at home than by working, and thus have little incentive to re-enter the job market.
If we assume very high levels of wage replacement could, in fact, deter some lower-wage recipients of unemployment benefits from returning to the workforce this summer, how might this labor shortage be addressed?
There are a few possibilities, in our view:
- Employers raise wages further to compete with enhanced unemployment benefits, and those higher wage costs eat into profits
- Employers raise prices on their goods and service as workers become more scarce and more expensive to hire
- Employers find another untapped pool of workers who are not eligible to receive unemployment benefits
Who might make up such an untapped pool? Teenagers. Between 1980 and 2010, the U.S. teen employment rate dropped by nearly half.6 It cratered even further last summer when many parents kept their kids inside. The types of summer jobs traditionally held by teens were scarce, anyway.
But even after a recent rebound in the teen employment rate, teenagers remain a significant stash of spare labor for the U.S. economy — hidden in plain sight, perhaps, but becoming widely available just as prime-age workers (25-54 years old) may be running in short supply. Teens may be able to find summer jobs for significantly higher wages than they could in prior years. That might incentivize more of them to join the workforce, especially if other opportunities normally available to them (e.g., traveling abroad) are absent due to the pandemic’s restrictions on mobility.
In truth, even if more generous unemployment aid keeps potential workers at home and teens don’t ride to the rescue, the effect on the economy should only be temporary. Jobs are returning and supplemental federal unemployment benefits will eventually disappear or shrink substantially, quickly bringing workers back into the fold.
Then there’s the Federal Reserve. What might Chair Jerome Powell have to say about labor market tightness at the Fed’s post-meeting press conference this Wednesday? With almost no likelihood of policy changes, he’ll be left to explain how (if at all) the Fed’s thinking has changed since mid-March, based on the blowout employment and consumer spending data we’ve seen since then, along with higher-than-expected inflation readings.
Additionally, as public U.S. GDP growth forecasts have continued to rise in recent weeks, it seems likely the Fed’s private projections have, as well. Even so, the Fed’s shift to a more dovish reaction function (i.e., tightening only in response to higher inflation, not falling unemployment) will allow Powell and his colleagues to punt on the question of heading off rising prices with restrictive policy, for now. As for wage pressures from the labor supply shortage and other factors contributing to higher inflation (e.g., rising commodity prices, clogged manufacturing supply chains), Powell will wave them off as transitory, and we agree.