Time of plenty
The jobs market in advanced economies has been somewhat bountiful in recent years, with both a high employment rate and plenty of vacancies on offer across the board, but are things about to change?
In the USA, UK and mainland Europe, unemployment rates remain low, but the latest data suggests the number of vacancies are falling from generally high levels and companies are becoming more circumspect about recruiting new employees.
If this trend continues, this might be welcome news for central banks, which are keen to stem wage growth, and hence high inflation, without producing a leap in unemployment.
Why the change?
Countries on both sides of the Atlantic have been amid the most intense rate-raising period since the early 1980s, as they try to combat inflation. But officials are anxious that a rush to find workers could trigger a 1970s-style wage-price spiral, where inflation lingers for years to come.
In the US, Reuters reported that data released recently showed openings fell at their sharpest rate since the start of the pandemic. In the eurozone, the closely watched purchasing managers’ index surveys for September showed job creation had dropped to an 18-month low, with employment in services no longer growing. In the UK, vacancy numbers have dropped from record highs and surveys suggest hiring activity is slowing despite staff shortages.
Central banks face a tightrope, as some analysts claim the pace and range of monetary strait-jacketing measures risks leaving millions without work, notably in the US, where the Federal Reserve has steadily increased borrowing costs.
What happens next?
As an example, the United States added 199,000 jobs in December as the unemployment rate stayed at 3.7%, according to data released by the Bureau of Labor Statistics (BLS).
This shows a slowdown in the job growth trends of recent years, and while higher unemployment brings its own hardships in many forms, the flip side is it also eventually offers relief from rising rates.
In a recent interview with the Financial Times, the former US Treasury Secretary Larry Summers predicted that it would take a recession that raises the unemployment rate closer to 6% to bring inflation under control.
Our take
Data due in the UK soon is expected to paint a similar picture of a slowing but still tight jobs market in which many older workers are standing on the sidelines.
But economists are revising up their 2023 unemployment forecasts for most countries. And this means that there will be some structural and characteristic changes in economies, meaning the smart investor should be aware of effects on bottom lines.
Essentially when interest rates rise, the price of assets trading on public markets — equalities, bonds, cryptocurrencies and commodities — tend to fall. So it’s a strange paradox that despite high employment generally meaning a healthy economy, investors might not always be thrilled to see a burgeoning jobs market. So if things go the other way, the astute investor ensures they’re ready.