It also could turn out that the 2% inflation level consumers and businesses have grown accustomed to since the 2007-2009 financial crisis may be the actual aberration. Weisman notes that for the 15 years starting around 1990 a 3% rate was the norm—and that was considered modest after the 1970s and 1980s.
No V-Shaped Boom Yet
It’s increasingly clear that the sharp, V-shaped recovery that much of Wall Street and the Fed were anticipating last spring is materializing. When the vaccination rollout spawned a dizzying euphoria in April, some economists predicted America would enjoy a year of 10% GDP growth not seen since the 1950s. “You can’t voluntarily shut down the global economy and then snap your fingers and expect everything to come back,” Cuggino says.
Labor markets are likely to dictate the ultimate trajectory of the economy and financial markets in the next few years. Bernanke told advisors at Schwab that this was the strangest labor market he had ever seen.
Indeed, with more than 10 million job openings, it seems incongruous that more than 4 million people have been quitting their employers every month since April. Contrary to popular stereotypes, these folks are not all waiters and waitresses looking to move up the income ladder, nor are they the wealthy boomers and clients of financial advisors retiring a year earlier than they had planned. As The Leuthold Group’s Paulsen told clients in a note, “The U.S. labor force was never hit as hard as it was in 2020.”
Over the last six months, the unemployment rate has dropped 1.5% to 4.6%. “If this measure of unemployment is accurate, the expansion is getting old,” Paulsen continues.
Like many, he surmises the bizarre circumstances created by the pandemic probably have “temporarily” shrunk the labor force. Some job market exiles are dealing with new child-rearing problems. Others are afraid to return to work for health concerns, and still more are likely to be engaged in a midlife career rethink.
Retirements are estimated to be running somewhere between 50% and 75% ahead of where they were expected to be before the pandemic began. “We’re seeing 1 million to 1.5 million more retirements” this year, Weisman says.
If the experience after the financial crisis is any indicator, a sizable chunk of those retirees may return to the workforce, on a part-time or full-time basis. But a lot of people with fat 401(k) balances are feeling flush. Weisman points out that a “job as a greeter at Office Depot may not be as enticing” to older workers when their wealth “has gone through the roof.”
He believes the Fed is likely to be very slow to realize there “has been a structural shift in labor markets.” It shouldn’t be. A decade ago, demographers were warning that there would be labor shortages in the 2020s as baby boomers retired.
“Today’s employment level is still 4.7 million below the record high” achieved before Covid arrived, Paulsen writes. “Every economic expansion of the postwar era was associated with new record labor force numbers.”
There is a silver lining in all the chaos. For several years, most advisors looking to grow their firms say the biggest constraint is a talent shortage.
“For a young person looking to start a career, it’s a great opportunity,” Cuggino says. “You can be choosy about jobs.”
What’s good for young workers may not be good for financial markets. “The markets believe the Fed can raise rates and take the steam out of inflation without causing a recession,” Weisman says. “It seems a little too good to be true.”