Jobs Report Soft, But That’s A Good Thing
Our new Federal Reserve Chair, Kevin Warsh, was graced with a reprieve last week in the form of surprisingly low net new additions to non-farm payrolls in June. Coming in at 57,000, they were well below expectations (113,000) and were joined by downward revisions to the two prior months’ numbers. At first blush, some may see this report heralding a weakening economy; we do not. Equity investors can actually take comfort in this report and even in the recent “hawkish” comments of the new Fed Chair.
Why Slower Job Growth May Support the Economic Outlook
Our positive view on the economy doesn’t simply arise from other data pointing to sources of strength (they do, but it is not uniform), but rather from realizing that this figure itself is a good sign rather than a bad one, in our opinion. June’s report and the prior months’ revisions leave the three-month average for new jobs at 111,000. This is low compared to additions in prior years, but we are living in very different times. Now, immigration as a source of workforce growth has largely disappeared and the best guess of the number of new jobs needed to absorb new entrants to the workforce has dropped to around 60,000. Recent job gains have been running well ahead of that figure. With that understood, we come away from Thursday’s report with a far more favorable picture of the health of the US economy, and so too the investing environment.
Federal Reserve Policy, Inflation, and Interest Rate Expectations
One immediate implication of the balance we are seeing between the most recent month of job creation and workforce growth is less pressure on Chair Warsh to raise the Federal Funds rate. Smaller job gains, versus prior months, mean less upward pressure on wages (and so prices), and have appeared alongside easing gas/transportation inflation as more oil makes its way through the Strait of Hormuz and as hopes for a broader resolution continue to build. We may not see interest rates fall materially anytime soon (inflation still remains well above the Fed’s target), but we now think it less likely the Fed will have to raise rates to tame that inflation. But, the usual caveat: if tensions with Iran resume and oil price declines reverse, all bets are off. Importantly, Warsh’s clearly “hawkish” attitude towards one side of the Fed’s mandate—to ensure price stability—should help to keep long-term inflation expectations anchored. If workers, employers, and investors believe inflation will remain contained, it’s far more likely that it will.
“If workers, employers, and investors believe inflation will remain contained, it’s far more likely that it will.”
Dr. JoAnne Feeney
AI Investment Trends and Long-Term Equity Market Opportunities
Equity valuations don’t need any new reason to contract. Higher rates would reduce the future value of earnings (and so valuations), so it’s helpful to put that concern to the side, at least for now. Other areas of strength continue to support equities. Most obviously, AI-related investments (data centers and power) are driving physical capital spending and this is creating growth in semiconductors, construction, industrials, and beyond. Adoption is pushing investments higher in other areas of the economy, too, and these are creating new growth potential in sectors including banking, health care, and services. Headwinds remain, however, as middle- and lower-income households bear the brunt of years of high inflation. Real disposable income has been running at slightly negative annualized growth rates in seven of the last 12 months as inflation undermines slowing wage growth. Fortunately, aggregate spending is also supported by gains in household assets. Overall, the long-term investing environment remains a healthy one, but we expect this divergence in spending patterns to persist and continue to select stocks with that in mind.