Traders and investors will get another opportunity this week to figure out the state of the U.S. labor market and, perhaps, solve the riddle of the tale of two tales of the U.S. labor markets: a tale of the labor market where people cannot find jobs, and a contrasting story, of a labor market where companies cannot find workers to fill positions.
The U.S. Bureau of Labor Statistics (BLS) will publish the September nonfarm jobs report on Friday. That’s the findings of a monthly survey of the jobs created by the nation’s business establishments. In addition, BLS will release the unemployment rate. That’s the findings of a monthly survey that measures the number of unemployed people as a percentage of the labor force.
Both reports are essential indicators of the state of an economy. Job creation is an indicator of the kind of business cycle the economy is in. Rising job creation is associated with virtuous cycles, whereby the new jobs generate additional income that fuels more spending and more growth, which helps create more jobs and more income, and so on. In contrast, declining job creation is associated with a vicious cycle of declining income and spending, which reduces future growth and job creation.
Meanwhile, unemployment indicates how well an economy allocates its resources and moves close to its production potential and maximum employment. The lower the unemployment rate, the better the economy is utilizing its resources and growing closer to its production potential and maximum employment. In that case, it becomes difficult for businesses to find workers and, therefore, they must pay higher wages. In contrast, the higher the unemployment rate, the further the economy is from its production potential and maximum employment. That’s when it’s easy for businesses to find workers.
What’s the situation right now? How far or how close is the American economy to its production potential?
There are two answers to these questions. One answer comes from the Federal Reserve, which thinks that the U.S. labor market has plenty of “slack,” meaning there aren’t enough jobs to allow the economy to reach its production potential and maximum employment. For instance, the U.S. economy added 235,000 jobs in August of 2021, the lowest in seven months and well below market forecasts of 750,000. Meanwhile, unemployment continued to hover above 5 percent, which the Federal Reserve considers too high. That’s why it hesitates to change its accommodative policies.
Then there’s another answer coming from the nation’s businesses, which think that the labor market slack is a myth, as they have a hard time finding workers. For instance, FedEx (NYSE:FDX) said a couple of weeks ago that its financial results were negatively affected by labor shortages, as have been those of retailers and homebuilders.
What could explain this riddle? The obvious answer is generous government benefits that encourage some people to stay home rather than get back to work. Yet as these benefits expired in September, things should soon return to normal. Job creation will pick up steam, eliminating the slack of the labor market, solving the riddle of the tale of two labor markets.
Hopefully, that will turn out to be the case in the September jobs report. Hopefully, the report will provide some clarity about the Fed’s next move as well.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.