Cloudy with a Chance of Uncertainty

Economic Commentary

Contributed by Doug Walters

Stubborn Wages

U.S. Non-Farm Payroll data for the month of May was released on Friday. The 138,000 jobs created was below the 184,000 predicted by analysts. While the result disappointed, this is one of the more volatile and unpredictable economic releases and investors should avoid putting too much weight on one data point. We always focus our attention on the broader employment trends, which are still positive.

Also included in this report is the current unemployment rate, which was reported to be 4.3%. This is very low by historical standards. History would suggest that this low unemployment rate should be accompanied by higher wage growth. As jobs become scarce, employers should have to pay their employees more to retain them. However, the chart below shows that this relationship is not as strong today as it has been in previous expansions.

What Is Driving This?

• One possible explanation of this is that employment participation is depressed. While the unemployment rate is low, there are many who have exited the workforce, which benefits the unemployment figure, but puts an overhang on wages if these individuals reenter.
• A more concerning cause could be automation and artificial intelligence. While breakthroughs in technology have been a boon for engineers and the high-tech industry, they have made obsolete some good paying manufacturing and service jobs.

Microsoft founder Bill Gates has suggested we start taxing companies that use automation to replace human jobs. While this sounds far-fetched, somehow as a society, we will have to figure how to operate in a world increasingly dominated by technology. As investors, we will continue to look for opportunities in tech and automation, while attempting to avoid those businesses heading towards obsolescence.

Week Ahead

Contributed by Max Berkovich

ABJECT Reality

Application for mortgages will be released for May by the Mortgage Bankers Association.

• Expectations call for a drop of 3.4%, but will lower interest rates this past month help surprise on the upside?

British Parliamentary Election (“snap”, which means out of cycle) are on Thursday.

• Prime Minister May called for the election in hopes of gaining a stronger majority for her Conservative party, which would allow for less opposition in her attempt to navigate BREXIT.
• At the time of the election declaration, PM May looked like a lock to pick up seats. Now the outlook is not so clear, and the markets are on edge.

JOLTS (job openings and labor turnover survey) report from the Department of Labor has become a key economic report, as it is Chairwoman Yellen’s preferred labor market indicator.

• This report helps fill in the picture of how tight the labor market is. With unemployment running at 4.3% this survey should help gauge if there are further jobs available in the economy.

European Central Bank is expected to keep rates unchanged on Thursday.

• More importantly will be comments from Mario Draghi on plans for Europe’s tapering of asset purchases down the road.

Consumer Credit report from the Federal Reserve should shed light on individual balance sheets of U.S. consumers.

• The last quoted number from the Central Bank was $12.73 Trillion, exceeding the level of debt reached before the financial crisis.
• Generally, economists believe that higher debt levels mean higher confidence in the economy for the future.

Trade Balance reports from Great Britain, France and China are due out Friday.

• The results from China will be under review by the President to see if progress is made on swinging the trade balance to the U.S.’s favor.
• The British report should shed some light on how much trade the country does with the EU.