As the financial markets fluctuate on trade war headlines, there remains a building and possibly underappreciated risk in the U.S. economy and financial markets – rising wages and labor availability.
Last week the U.S. Department of Labor reported jobless claims declined to 215,000. Although I don’t follow government data closely, even I know that’s an extremely low number. In fact, according to Bloomberg, jobless claims are currently at a 45 year low and “underscore a persistent shortage of qualified workers”.
The last time I remember the labor market being this tight was in 1999, when unemployment was near similar levels (low 4%) and labor availability was also a growing issue (chart). However, interest rates were considerably higher in 1999, with the federal funds rate near 5% and a long bond trading at twice today’s yield. With similar signs of labor market stress, I find it interesting the current federal funds rate is so much lower at 1.5%-1.75% (chart) and the Federal Reserve’s balance sheet is so much higher (chart).
In my opinion, the most glaring difference between today and 1999 is two asset bubbles. Considering the consequences of the past two market cycles, it shouldn’t be surprising if central bankers prefer appearing behind the curve versus being blamed for another bubble bursting and Great Recession (see I’ll Be Gone You’ll Be Gone Central Banking).
Tomorrow the government will release the March jobs report. Will the report show the economy is in a “Goldilocks” phase (February report) or will there be growing evidence the Fed is falling behind the curve (January report)? In other words, will risk asset holders receive a hall pass for another month, or be sent directly to detention for bad behavior?
While the marco headline game is very entertaining, I have no idea or interest in what the government will report tomorrow. Instead, I’ll continue to rely on the information I gather from hundreds of operating businesses to form my opinion on the health of the economy and labor market.
One of my favorite labor market indicators comes from the uniform companies. UniFirst (UNF), a market-leading uniform company that provides uniforms for nearly 2 million workers, often discloses useful data and commentary. UniFirst reported earnings last week, providing investors with a summary of their operating results and the current labor market.*
For the quarter, UniFirst’s uniform business generated organic revenue growth of 5%. Management noted the company continues to benefit from new accounts as well as “positive price adjustments”. Profitability also benefited from pricing, as operating margins increased to 10% from 9.2% a year ago. Offsetting several positive contributors to margins, were higher healthcare claims and payroll costs. Energy costs were also higher.
Management expects margins to moderate in the second half of the year due to difficult comparisons, partially from “positive price adjustments” made during the second half of last year. Furthermore, management noted, “…employee wages continue to be impacted by the low unemployment environment. As we continue to invest in our people and infrastructure, we anticipate higher payroll costs as a percentage of revenues. Rising energy prices are also forecast to provide a headwind in the second half of the fiscal year.”
And finally, management had some interesting commentary on the current labor market as it relates to their uniform adds and reductions.
“It’s very similar compared to a year ago. So, we’re not really seeing any significant pull from big adds hiring within our customer base. I think that’s a little bit of indicative as the economy and the low unemployment environment and the competition and the difficulty to find labor. And we’re seeing some of that on our side as well.” Management went on to note that they are seeing some improvement in their Texas markets due improvements in the energy industry.
UniFirst’s quarter and commentary supports many of the recent trends I’ve been noticing and documenting. First, the labor market is tight, with some businesses having difficulty expanding or “adding” new employees. Second, corporate costs, on average, are rising. And finally, I’m noticing an increasing number of companies responding to higher costs and making “positive pricing adjustments”.
Although I’m uncertain as to what Friday’s job report will show, if I was using UniFirst as a guide, I would estimate a lower jobs gain number (down from 313k+ in Feb) and a higher average hourly wage number (up from +2.6%). In effect, fewer hires and rising wages would reflect the growing difficulty businesses are having finding qualified labor. While this is what I would expect, I have 0.0001% confidence in my prediction. Although it can be fun to play “guess the macro number”, I’ve found government data to be very unpredictable and frequently more volatile than underlying trends in the economy (see You’re Hired You’re Fired).
Regardless of the actual number, the government’s assessment of the labor market will not influence my opinion on the economy and decision making. I’ll continue form my macro and profit cycle opinions from the bottom-up. With Q1 2018 earnings season quickly approaching, I’m looking forward to learning and reporting more soon.
*UniFirst transcript source: Seeking Alpha