On Tuesday, we learned that US employers had a record 11.5 million job openings as of March. That’s arguably the clearest sign that the economy is booming, as hiring workers are not cheap and most employers will only do it if they already have the demand to keep up with the staff.
Currently, there are just 5.9 million people who are unemployed. In other words, there are almost two job openings per unemployed person. The mismatch means that workers have a lot of options, which means they have to pay a lot more to ask for leverage. In fact, employers are looking at a historic rate.
But booming demand, record job openings, and higher wages… are badWhat?
The Federal Reserve and many other economics professions are not keeping it so bluntly. But that’s mainly their message.
The state of play: Demand for goods and services has been outpacing supply, 1 which has been sent to inflation for several years. This is partly due to the fact that higher wages mean higher costs for businesses, and many have higher prices to preserve profitability. Ironically, these higher wages have helped bolster the already-robust finances of consumers, who will be up and running and keeping up with essentially rising enabling businesses.
Job creation (ie, a phenomenon where someone goes from earning nothing to earning something). In fact, the US has created a whopping 2.1 million jobs in 2022 so far.
The Bureau of Labor Statistics has a metric called the index of aggregate weekly payrolls, which are the product of jobs, wages, and hours worked. It’s a rough proxy for the total nominal spending capacity of the workforce. This metric was up 10% year-over-year in April and has been above 9.5% since April 2021. Before the pandemic, it was trending at around 5%.
This combination of job growth and wage growth has only been exacerbated by the inflation problem.
The best solution, at this point, seems to be to tighten monetary policy so that financial conditions become a little more challenging, which should cause demand to cool, which in turn should alleviate some of these persistent inflationary pressures.
In other words, the Fed is working to take the legs out of some of the good news coming from the economy.
The Fed moves to trim ‘excessive demand’
In a widely-anticipated move, the Fed raised short-term interest rates by 50 basis points to a range of 0.75% to 1.00%. This was the largest increase the central bank made in a single announcement since May 2000.
Furthermore, the Fed Chair Jerome Powell signed the Federal Open Market Committee’s (ie, the Fed’s Committee on Monetary Policy) intention to keep hiking rates at an aggressive pace.
“Assuming that economic and financial conditions are evolving in line with expectations, there is a broad sense that the Committee should increase that additional 50 basis points to the next couple of meetings,” Powell said. “Our overarching focus is on using our tools to bring inflation back down to our 2% goal.”
To be clear, the Fed isn’t trying to force the economy into a recession. Rather, it’s trying to get the most out of demand – as reflected by there being more job openings than unemployed – more in line with supply.
“There’s a lot of excess demand,” Powell said.
Currently, there are massive economic tailwinds, including excess consumer savings and booming capex orders, that should propel economic growth for months, if not years. And there is room for the economy to go from some pent-up pressure to going without demand.
Here’s more from Powell’s press conference on Wednesday (with relevant links added):
It’d be a far more risky situation if consumer and business finances were stretched out and there was no excess demand. But that’s not the case right now.
And so, while some economists are saying that the risk of recession is rising, most don’t have it in the near future for their base-case scenario.
Is it stocks for bad news? Not rather.
When the Fed decides it’s time to cool the economy, it does so by trying to tighten financial conditions, which means the cost of financing stuff is going up. Generally speaking, this means some combination of higher interest rates, lower stock market valuations, a stronger dollar, and tighter lending standards.
Does this mean stocks are doomed to fall?
Well, a hawkish Fed is definitely a risk to stocks. But nothing is ever going to come down to stock prices for the outlook.
The Fed is a tightening monetary policy. The Fed tightens its monetary policy when it makes sense.
Nevertheless, higher interest rates are definitely a concern for the prospect. Most stock market experts, like the billionaire Warren Buffett, agree that higher interest rates are more likely to be the case for bearish, like the next 12-month (NTM) P / E ratio.
But the key word is “valuations,” not stocks. Earnings are going up as long as stock prices do not need to fall in line with demand. And earnings have been going up. And indeed, valuations have been falling for months.
Credit Suisse’s Jonathan Golub captures this dynamic below the chart. As you can see, the NTM P / E has been trending lower since late 2020. However, stock prices have mostly increased over the period. Even with the recent market correction, the S&P 500 is higher than it is today when valuations started to fall. Why? Because the next 12 months’ worth of earnings are essentially going up.
To be clear, there are no guarantees that stocks will keep falling from their January highs. And it is likely that future earnings growth could turn negative if the business environment deteriorates.
But for now, the outlook for earnings is remarkably resilient, and that could provide some support for stock prices, which are currently a pretty typical sell-off.
More from TKer:
📉📈📉📈 Stocks go haywire: The S&P 500 declined by just 0.20% to round out an incredibly volatile week. On Wednesday, the S&P surged 2.99% in what was the index’s biggest one-day rally since May 18, 2020. The next day, it plummeted 3.56% in what was the index’s second worst day of the year.
The S&P is currently down 14.4% from its January 4 intraday high of 4,818. For more on market volatility, read on this, this and this.
💼 Job creation: US employers added a healthy 428,000 jobs in April, according to BLS data released Friday. Economists expected more than 380,000 jobs this year. The unemployment rate stood at 3.6%. For more on the state’s labor market, read on this.
📊 Services activity growth cools: According to survey data from the Institute of Supply Management, the services sector activity has been decelerated in April. From Anthony Nieves, Chair of the ISM Services Business Survey Committee: “The services sector for growth, which has expanded all but two of the last 147 months. There was a pullback in the composite index, mostly due to a restricted labor pool and slowing new orders growth. Business activity remains strong; However, high inflation, capacity constraints and logistical challenges are impediments, and the Russia-Ukraine war continues to affect material costs, most notably of fuel and chemicals. ”
Up the road 🛣
There’s no big story in the economy right now. So, all eyes will be on the April Consumer Price Index (CPI) report, which gets released on Wednesday morning. Economists estimate that the CPI was up 8.1% year-over-year during the month, which would be a deceleration from March’s 8.5% print. Excluding food and energy prices, the core CPI is estimated to have increased by 6.1%, down from 6.5% in March.
Check out the calendar below from the transcript of some of the big names announcing their quarterly financial results this week.
1. We’re not going to get into all the nuances of supply chain issues here (eg, how labor shortages in the US, COVID-related lockdowns in China, and the war in Ukraine are disrupting manufacturing and trade). However, we know supply chain issues are reflected as persistently slow suppliers’ delivery times.
2. For those of you new to TKer, I’ve written a bit about how good economic news has been. You can read more about it here, here, here, and here.
3. Investing in stocks is not easy. This means having a lot of short-term volatility to cope with. Those are the short-term losses of trying to make the market and sell and buy an effort. But of course, the risk is missing out on those large rallies that occur during volatile periods, which can do long-term returns to irreversible damage. (Read more here, here and here.) Remember, there is a whole industry of professionals to beat. Few are able to outperform any given year, and of those outperformers, few are able to continue that performance year in and year out.
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedInand YouTube