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We Need Higher Rates Now
As we note in our story below, wage growth slowed markedly in the latest jobs report.
That had been the one saving grace in our fight against inflation.
Now, we need higher rates and soon.
Markets expect the Fed to hike its Fed Funds rate by 0.25% this month.
In reality, we probably need to be at 0.75% right now.
Remember the backlog at the ports in L.A.? Those haven’t gotten any better.
The invasion of Ukraine only adds pressure to the already fragile global supply chains.
You may think it callous to charge consumers more when things cost so much these days.
But without supply far below demand and incapable of growing, the Fed needs to step in. Otherwise, we truly risk runaway inflation.
The Fed’s job right now is to drive demand down to match supply levels. Once that happens, they’ll keep rates steady.
So, be prepared for a wild ride in the markets over the next year as they try to establish that equilibrium.
This Worrisome Job Trend
Friday’s jobs report continued months of strong gains. But the labor force participation rate remains exceptionally low.
The U.S. labor force grew by 304K while the total unemployed dropped by 243K.
That helped push the labor force participation rate up 0.1% to 62.3%.
The labor force participation rate is an estimate of the economy’s active workforce. It takes the total civilian labor force, which is everyone employed or looking for work and divides it by the civilian noninstitutional population.
Over the last several decades, the U.S. has seen a marked decline in the labor force participation rate as baby boomers retire.
However, the drop in 2020 came as people simply stopped looking for work.
We need to see the rate move back towards 63% before we start to see labor demand ease.
However, we may already be seeing signs of this happening.
With hourly wages only rising $0.01 from last month, demand for labor may either be slowing or employers are giving up.
Either way, lower wage growth is good for stocks with heavy labor such as grocery stores like Kroger (KR), Walmart (WMT), and Costco (COST).
But Our Needs Are Great
Leisure and hospitality gains lead the way again with 179K job gains in February which was 12K more than the prior month and still huge. The unemployment rate in this specific sector is down to 6.6%.
According to the last Jolt Jobs report, there are still 1.8 million openings in that sector out of 9.9 million total private sector openings. The gap between labor demand and supply is still wide, if not expanded in the last six months.
The Bottom Line: The low labor force participation rate suggests there are still people out there who have yet to reenter the workforce. We need them now to help cool inflation.
The long-term implications of the participation rate are somewhat worrisome. We need to see our workforce growth through either higher birth rates or immigration. Otherwise, we’ll have a lopsided age-related economic gap that could send the U.S. into a stagflationary environment like the 1990’s.
For investors, that could lead to a multi-year sideways market similar to what we saw in the 1970’s.
That type of environment favored those who waited for discounts on stocks with solid cash flow, such as Apple (AAPL), Walmart, Intel (INTC), and other large blue chip names.
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