By Deborah DeMatteo
Managing Director & Chief Investment Officer
Over the next several months we will possibly see the end of monetary accommodation. Since the financial crisis and the bottoming of the stock market in March of 2009, we have looked to the Federal Reserve for support and creativity in re-writing the rules to guide the economy back to stability. With the termination of quantitative easing in October of last year the next step will be for actually tightening of monetary policy and raising rates. The question remains whether the economy is strong enough to handle higher rates.
Since May is the month that sends thousands of new college graduates into the workforce, it is a coinciding time to take a deeper look at the labor market. At the peak in 2009 the unemployment rate topped 10 percent. Since then we have come down to 5.5 percent unemployment, as of the most recent report. During the period of decline there has been much debate over the quality of the headline employment number. Most notably, economists and analyst refer to the participation rate, which reflects the people whom are of working age but are not actively looking for employment. It has been argued that although the unemployment number is low, it is not representing the real employment picture, due to the fact that many people could return to the workforce at a ny time they feel that the opportunities are improving. This creates what is referred to as “slack” in the market, meaning that it will take a long time for the labor market to tighten because workers will return to the workforce over time. Many are beginning to question how much slack there is in the labor force.
As the world debates the timing and ability of the Fed to raise rates, there are signs that the labor market is already tightening. Just this week Wal-Mart announced it would raise minimum wages for over 100,000 U.S. employees, its second wage hike this year. The company said in February that they would raise wages for 500,000 U.S. employees. As retailers and fast food chains have begun to struggle to retain workers, other employers such as Targe t Co rp. , T JX Cos., a nd McDonald’s Corp. have had to make similar moves. Kory Lundberg, a spokesman for Wal-Mart, said “We do think this (wage Increase) will help reduce turnover and increase retention.” In addition to the wage increase Lundberg also noted that Wal-Mart will start paying store associates 10 percent more per hour upon promotion, starting in August. Workers have a renewed confidence that they can leave their job and will have the ability to find another one, creating greater turnover costs for employers. We can see this reflected in the number of available people per job opening statistics. At the height of the great recession the number stood at 10, meaning there were 10 workers available for every job opening. Today that number stands at 3, below the precrisis level, leaving only 3 people available for every opening. Another indicator showing that there is strength in the overall market is the voluntary quit rate as measured by the JOLTS, or Job Openings and Labor Turnover Survey, which is currently at 3.75 percent and has been steadily rising since late 2011.
Consumers will be willing to spend more, not just because of higher wages, but because more confidence in the future. Deutsche Bank economist Torsten Slok compiled data that shows workers are as optimistic about their jobs and wages today as they were since before the financial crisis. For one, the percentage of workers expecting their income and wages to rise this year is at the highest since the middle of 2008. About 55 percent of workers surveyed by the University of Michigan felt their household income would increase over the next year. Not only are worker optimistic that their income will rise, but also the amount it will rise. According to the survey, workers are expecting their income to increase about 3 percent more during the next year. This is the largest expected growth since the Recession began. While workers can expect wage increases, companies must also be willing to give them those raises. According to the University of Michigan study 12-13 percent of companies’ surveyed plans on raising wages this year. That compares to a low of around 3 percent in 2010. The healthcare sector is beginning to feel the pressure. According to the March data from the U.S. Labor Department and the Census Bureau, healthcare and social assistance jobs are slightly more plentiful than the number of healthcare workers to fill them. Healthcare organizations according to Elise Gould, director of health policy research at the Liberal Economic Policy Institute stated, “(…) I feel like soon, if not now, they are going to have to offer higher wages to attract and retain the most qualified workers.”
Wages are not the only way employers attract and retain talented people. Gary Burtless, an economist at the Brookings Institution said, “Most of these companies are motivated by the desire to reduce the turnover rate to a number that is more affordable to them.” Mark Bertoline CEO of Aetna mentioned raising wages would partially offset the $120 million in turnover costs it accrues every year. Some companies are taking action to reduce turnover with benefits other than just higher wages. Health insurer Anthem is offering its employees a free college education. Anthem employees can sign up for online degrees in business and health care at the College for America at Southern New Hampshire University. Starbucks pays for its workers to get a degree from Arizona State University online. Employers offering education see it as a way to keep and attract employees that will stay long term.
Although we can still debate the quality of jobs available and the reliability of the government statistics that report the unemployment rate, we need to pay attention to those that are hiring. Listening carefully to what they are saying and watching closely at what they are doing should tell us a lot about the current state of the jobs market. Combine these statistics with the latest auto sales, indicating we are on track for the best year in almost a decade, and you have to start to connect the dots that consumers are beginning to spend again in a meaningful way. Low interest rates are irrelevant if you don’t have a job. Our focus should be on the beneficiaries of higher consumer confidence, better wages, and higher interest rates. Rates will go higher, we just don’t know when or by how much. We will be looking for the industries that will benefit from this environment.