The pandemic has had a permanent negative effect on labor supply, and this is a crucial reason why there are worker shortages and, therefore, why wage pressures are so intense, see charts below. There is little the Fed can do about this other than continue to destroy demand.
Total US employment is now back at pre-pandemic levels, but the jobs recovery has been very uneven across sectors, with total employment significantly below February 2020 levels in clothing stores, furniture stores, and electronics stores, see tables below. This is in contrast to the jobs recovery in warehouses, couriers, and air transportation, where employment levels today are substantially above pre-pandemic levels.
One way to measure a country’s competitiveness is to look at how much wages are rising adjusted for productivity gains, and the chart below shows that since the financial crisis wages have increased much faster than productivity in Germany. The bottom line is that Germany is becoming less competitive relative to the rest of Europe.
The 22 million jobs lost during the pandemic have now been recovered, see chart below. Total US employment at 153 million jobs is now back at the level seen before the pandemic in February 2020.
Last Friday, we learned that the US economy added 528,000 jobs in July, that the unemployment rate declined to 3.5%, and that average earnings grew by 5.2%. With roughly 153 million people working in the US, we are at the same level of employment we were in February 2020 before the global pandemic. All told, these numbers were much stronger than the consensus had expected. The Federal Reserve has repeatedly raised interest rates in an attempt to cool the economy down to combat elevated inflation, but this acceleration in job growth in an indicator that the US economy continues to hold strong despite these efforts. The consequence for markets is we should expect the Fed to continue to raise rates. In fact, markets have begun pricing a 75 basis points increase in interest rates in September. Additionally, rates may need to stay higher for longer than markets were previously anticipating. Later this week we will receive Consumer Price Index (CPI) inflation data. June CPI headline inflation was 9.1% and the consensus expects that number to be at 8.7% in July. If expectations are on target, this will be the long-awaited decline in inflation we’ve been waiting for.
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The employment report for July shows that the US economy is still not showing any signs of slowing down. With financial conditions easing, the Fed will have to continue to raise rates aggressively to cool down the economy, see chart below. Our set of daily and weekly indicators for the US economy is available here.
The market cap of the German stock market as a share of global stock markets is near record lows, driven by equity market underperformance and the rising dollar, see chart below. For comparison, Germany’s GDP is currently at 3% of global GDP.
There are around 2000 bonds in the HY index and roughly 16% currently trade at a yield higher than 10%, see chart below.
