Impacts of the Tight Labor Market

The Employment Report came out today (Friday, Sept. 7)  at 8:30 a.m.. This is probably the most impactful economic report for the market, and today’s report will make investors reposition some parts of their portfolio. First let’s look at the report. It was a strong report. While the Unemployment Rate remained at 3.9%, the net number of jobs added (non-farm payrolls) increased by 201,000. That is a lot of jobs. More importantly, the mix of jobs was very healthy for the economy. Construction jobs were strong while government jobs actually fell by 3000. Additionally, Hourly Earnings are beginning to creep upwards at 0.4%. This is a double edged sword. On the one hand, it is putting money in consumers’ pockets. On the other hand, it raises the spectre of inflation. Economists have been reading the tea leaves for some time waiting for the scarce labor market to lead to increased wages. Now it is beginning to show up in the data. The markets will see this data and react. Here are some of the economic and financial ripples that will follow, some of which will impact various sectors.

1. The Fed will now definitely tighten in September. They were already predisposed to tightening, but this latest report will ensure that the Fed confidently tightens. Ultimately, this means further increases in short term rates. The financial sector should benefit as their net interest margin increases.

2. The dollar will strengthen. This will make exports more expensive, so export intensive industries will continue to fight the increased dollar exchange rates. Companies that import significant amounts of their inputs will benefit.

3. Energy costs will drop. Oil is paid for with dollars abroad – and as the exchange rate increases, it will put downward pressure on oil prices.

4. Industries that require lots of trained labor are going to be under pressure. They face two unpleasant consequences: 1) they can’t find adequate numbers of employees and 2) they will have to increase wages to compete for these skilled workers.

5. Consumer Discretionary firms will benefit as consumers have more discretionary income. More people are employed and more people are making increased wages.

Obviously, one employment report is not enough to generate all of these changes. But employment has been strong for over two years, and this cumulative effect will drive significant changes. This is one of those times where it is really important to stay on top of the economic reports. Your portfolio will benefit!