Morgan Stanley
  • Wealth Management
  • Jun 15, 2021

How Tight Is the U.S. Labor Market?

Why the disconnect between robust hiring demand and still elevated joblessness may persist, and how investors can prepare.

Lisa Shalett Chief Investment Officer, Wealth Management

Lately, signs of a disconnect in the U.S. labor market have been mounting: As the economy recovers and businesses reopen, many employers are eager to hire, yet they often can’t find workers to fill the roles. 

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Explanations abound. Some believe that pandemic-related federal aid may dissuade a population of the unemployed from returning to work. Others cite a host of factors, such as public-health concerns, availability of childcare, the seasonality of school reopenings—even excess personal savings.

Other factors have created unusual market dynamics. Some manufacturers, for example, have had to cut shifts for a lack of key production materials. This is also an issue for homebuilders, who face a catch-22: They lack enough workers to start jobs, but delaying those starts has contributed to job losses in construction. All of these conditions may be impeding a more robust U.S. labor market recovery.

Many of these factors are short term, but we believe that structural economic changes are also influencing today’s labor-market dynamics and could have longer-lasting implications for investors. These include:

  • Accelerated retirements: According to Morgan Stanley & Co. Chief U.S. Economist Ellen Zentner, in the 12 months to February 2021, the U.S. retiree population rose from 18.5% to 19.3%, or some two million more people. This higher-than-pre-pandemic trend cannot be explained by aging alone.
  • A widening skills gap: According to the Labor Department, a record 9.3 million jobs were available in April. One explanation may be the growing gap between the skills companies need and the ones workers possess. It also suggests that the labor market is tighter than headline unemployment data would indicate, as companies compete for qualified workers.  
  • Geographic imbalances in the labor pool: Some towns, cities and states have experienced acute labor shortages, as pandemic-related relocations have become permanent for many people. 

These factors mean that, in the near term, labor market slack may not be what it seems. Indeed, the Employment Cost Index showed that wages and salaries grew at a 4.1% annualized rate in the first quarter of 2021, much higher than expected, given the headline rates of unemployment. This, in turn, means that inflation could prove more durable. Higher prices—already a reality, with the core consumer price index at 3.8%—could help redirect excess personal savings from consumption toward retirement savings.

Against this backdrop, we encourage investors to watch average hourly earnings, total real income and the Employment Cost Index for evidence that “sticky inflation” is emerging. Investors should also emphasize security selection, with a focus on companies that have pricing power and levers to sustain profit margins in the face of growing headwinds.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 14, 2021, “Slack or No Slack.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report.

Risk Considerations

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom.  Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, and sale, exercise of rights or performance of obligations under any securities/instruments transaction.

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