Labor Market Slowing, Corporate Profits Growing
What happened last week?
Last week, the S&P 500, Dow and Nasdaq gained 0.87%, 1.59% and 0.25%, respectively. But the big news was the performance of Small- and Mid-Cap stocks after the Consumer Price Index (CPI) showed inflation had eased further.
Finally, the Republican National Convention will take place on July 15-18 in the aftermath of an assassination attempt on former President Trump Saturday in Pennsylvania. Trump is expected to announce his Vice-Presidential running mate selection.
3 Things to Know
Post-Pandemic Pattern for Labor and Corporate Profits Likely Reversing
Employee compensation in the US slowed to a roughly 5% growth pace in the first quarter. This counts both the newly employed and the wages, salaries and benefits of those already employed in total.
Preliminary data for the second quarter suggest a similar pace, decelerating through quarter end. Meanwhile, we expect US companies to report a gain in EPS of greater than 10% in the second quarter or double the rate of national employee compensation in coming weeks.
It is not uncommon for corporate profits — the “small” difference between sales and business costs — to rise and fall much more sharply than worker compensation.
As “residual,” profits earned by companies and their shareholders are far more volatile than sales or costs. What is uncommon is for profit growth across the economy to accelerate while compensation decelerates — that is outside of the beginning periods of a new economic recovery.
US Unemployment Rate Rises
So why would the US labor market slow? The pandemic caused large and unusual swings in not just the overall economy, but the composition of economic activity.
Consumer goods and housing boomed within 2020 despite social restrictions. A recovery in services activity — such as hospitality and leisure — was put off largely until 2022.
It is not uncommon for a restaurant to have more workers than a large warehouse or a largely-automated factory. Between 2020 and 2022, the swing in US services employment — from collapse to boom — was the largest as a share of total employment since World War II.
These industries — most heavy in head count — are slowing. While preliminary data are unreliable, government employment gains were more than a third of all job gains in June. A pattern of sharp downward revisions to earlier months suggests that reported job gains may in fact be overstated.
Data Points Toward the Fed Easing this Year
With the US unemployment rate rising more than a half a point in the past year, wage growth decelerating and the Fed’s policy rate above the rate of unemployment, we believe that only “committee inertia” will keep the Fed on hold when its policymaking committee meets late this month.
By September, we would expect some likely action to move US monetary policy away from the Fed’s self-described “restrictive” stance. If so, the Fed will be doing this while corporate profits are growing.
See our weekly CIO Strategy Bulletin for more details