Companies added more than half a million workers in May, but hires fell short of expectations. Here, a restaurant is asking for help.

Rob Pinney / Getty Images

Text size

Investors pushed stocks higher after Friday’s jobs report showed hiring continued in May and the lowest unemployment rate in the pandemic. They can be too complacent.

The 559,000 increase in non-farm payrolls last month, while not insignificant, was lower than the increase expected by economists. Additionally, this is the second consecutive month of disappointing hires despite oversupplied economy-wide demand, highlighting the biggest bottleneck facing a recovering US economy in the throes of shortages: that of workers.

The details of the report highlight the problem. Wage inflation accelerated unexpectedly and labor market participation slipped surprisingly – declining participation is one of the reasons for the reduction in the unemployment rate – even as 1.5 million fewer people said it was pandemic shutdowns or business losses that separated them from a job.

The reasons employers have difficulty hiring are clear. Increased unemployment benefits have made it more difficult for employers to fill low-paying jobs, working parents continue to struggle for childcare and some workers are absent due to pandemic concerns.

Fadi Achour, general manager of Delta Hotels in Romulus, Mich., Looks forward to September, when an additional $ 300 in weekly federal unemployment benefits expires. It’s also when schools reopen for the fall. Achour, which operates with a third of the housekeeping staff despite rising wages, can only book 100 of the 271 rooms due to staff shortages. Until September, says Achour, “the plan is not to think about profits. We think about how much less we can lose.

Investors also wait until September, which actually means October, when September data arrives. As 25 states have now chosen not to benefit from the enhanced unemployment insurance payments before the federal expiration, some relief may come sooner. The largest states, including Michigan, are not on the list. And the fact that large employers like


(ticker: AMZN) have raised the minimum wage, it is harder to say that the wage increase is temporary and that it will be much easier to hire without paying more, regardless of the expiration of pandemic benefits.

For now, investors like what they see. Hiring can be disappointing, but it’s not exactly weak, according to Citi economist Andrew Hollenhorst. And overall, the May report isn’t going to generate a “rethink” of the Federal Reserve’s easy money policies, he said.

That’s not to say he shouldn’t. “There are now clear signs that wage gains are setting in, which would support a narrative that a labor shortage is now a major driver of job growth,” said Michael Shaoul of Marketfield Asset Management.

Average hourly earnings over the past two months have grown at an annual rate of 7.4%, two to three times the growth rate typical of recent decades, said Gad Levanon, an economist at the Conference Board. It is then that the changes in composition (because the service sector, dotted with less well-paid jobs, explodes) in fact weigh on the calculation of the average hourly wage, without pushing it higher.

As Shaoul puts it, investors must recognize that very strong growth in demand responding to strong supply constraints, coupled with excess savings and financial liquidity, leads to both inflationary pressures and financial speculation.

“We’re at the point in the cycle where the problem gets worse, but nobody really cares,” he says. The Fed and many investors say the price hike is the product of booms reopening, supply shortages will ease, and high inflation is therefore transient.

But that misses the point. “The ramifications last,” Shaul says. “The longer this lasts, the more likely it is that the unintended unwanted consequences will escalate, but we accept that it will take some time before these make themselves felt in a way that changes the policy or consensus of the parties. investors. “

In the meantime, Shaoul is particularly fond of stocks in the energy and materials sectors, where supply is an issue but demand is not. He also looks at Brazil and Russia, he says, unattractive for years but increasingly promising as US stocks inevitably begin to underperform at best. This is especially true, Shaoul says, with so many US stocks trading at price-to-earnings ratios above 25, meaning their earnings return is already below the consumer price index.

Looking a little further, it may be prudent for investors to consider a potential stagflation scenario. “Because this was such a deep downturn and a rapid recovery, we may be later in the cycle than we think and think we are,” Citi’s Hollenhorst said. He says we could be at a “very mature” point in the cycle as early as 2022, which means growth could slow significantly as price pressures persist. A Fed forced to lean against inflation with real gross domestic product growth of around 2% would tip the economy into recession, he said.

Even though it’s worth preparing for it, many economists and fund managers say stagflation is not their basic plan. They are waiting for September.

Focusing on wages and other data on inflation, labor force participation rate and anecdotal evidence from companies across the country that the labor market is tighter than it looks , as the Fed’s recent Beige Book shows, investors could take the plunge, only to see labor and other shortages abate.

At the risk of being treated as inflationists, investors could however anticipate a potential wage-price spiral that has no other outcome than stagflation and then recession. Labor shortages and higher prices are temporary until they aren’t, and a lot can happen between now and September’s data.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com