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The Retired Investor: Where Have All the Workers Gone?
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Help wanted posters continue to populate storefront windows in a multitude of service-related businesses across the nation. The U.S. has 3 million more job openings than it did before the pandemic. This labor imbalance is entering its third year. Why has it been so difficult to remedy?
First, I would like to dismiss any assumption you may have that American workers are lazy and simply don't want to work. That attitude is neither true, nor particularly helpful, in understanding the major forces that are at play in this nation. Instead, I see four main areas that largely explain America's labor dilemma.
Let me start with older workers like myself, who left the work force. Prior to COVID-19, neither my wife nor I had any plans to retire, although we were both close to, and over, the typical retirement age. However, the risk to our health and life in the pre-vaccination days convinced us to leave the work force. More than 3 million Baby Boomers did the same and retired early. That was 2.6 million more people than labor experts predicted. That left a big dent in the available work force.
In addition to early retirement, COVID-19, itself, continues to be an important reason for our labor shortage. The Brookings Institute believes COVID could be keeping as many as 4 million workers out of the labor force,
Despite its disappearance from the daily news feeds, mutations of COVID-19 are everywhere. In just 13 days, between June 29 and July 11, 2022, more than 3.9 million workers took sick leave due to catching the virus or having to care for someone who was infected. That is double the rate of sick leave due to COVID-19 in the same time period last year.
Another factor in this lopsided labor imbalance is the shortage of women in certain areas of the workforce, especially Black and Hispanic women without college degrees. These women made up a goodly portion of the work force in some service sectors like restaurants and retail stores. COVID infections are a factor in the decline in numbers, but the lack of access to affordable childcare is the bigger problem keeping many women at home.
The simple fact is that there just are not enough people working in the child-care sector to meet demand. Employment levels are 8.45 percent lower today, than in February 2020. Even before COVID-19, the child-care industry was in trouble, but its poor financial health today prevents most programs from offering competitive compensation in an already-tight labor market.
As it is, child-care expenses are equal to or higher than the wages earned in many minimum wage jobs.
Immigration, or the lack thereof, has also crippled efforts to address the supply/demand imbalance of labor in the U.S. Normally, when a country can't find enough workers to do the jobs necessary to keep an economy humming, they import labor from abroad. Not so under America's recent immigration policies.
From picking apples in New England, to staffing high-tech positions in Silicon Valley, our present partisan policies have reduced those workers to a mere trickle. The U.S. issued 4 million nonimmigrant visas in 2020, which is half as many as it issued in 2019, and nowhere near the 10 million issued in 2016.
Last year, the number of L-1 visas (used to transfer an employee from a foreign country to the U.S.) dropped 68 percent to only 24, 863, while temporary work visas saw a similar drop in numbers. The situation is expected to get worse as old visas expire and new visa issues continue to decline. Many of the sectors that have the highest rates of unfilled positions are those that historically were filled by immigrants like hospitality and transportation. The unfortunate truth is that many immigrants often take jobs that Americans do not want to do. Most businesses know that, but that does not seem to matter to the voters and their representatives opposed to immigration.
There is some good news. Recent data has pointed to a rebound in workers re-entering the job market, which has caused a rise in labor force participation. In August 2022, 786,000 people re-joined the labor force. My wife, for example, decided to go back to work, part-time this year.
However, the rate of gain for workers over 55 years of age fell in August 2022 to only 38.6 percent of the work force. Overall, just 2.8 percent of early retirees went back to work since the beginning of this year, according to data from the Census Bureau's Current Population Survey.
As a result of these factors, the wage growth spiral we are experiencing will continue. And as it does, the inflation rate will continue to be a major problem for the Fed, for the economy, and for the stock market. Is there a chance that somehow the labor shortage will fix itself?
Doubtful, since I see little enthusiasm to expand immigration, nor for a comprehensive and universal answer to child care. The rate of COVID-19 infections will continue to grow, since most Americans have decided to pretend it does not exist. And as for Baby Boomers like myself, we aren't getting any younger.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: September Is Tough Month for Equities
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Since 1928, the S&P 500 Index has lost ground in September more than 55 percent of the time. It looks like this year will be true to form.
It is called "The September Effect" and no one market or news event has been responsible for this anomaly. Some attribute the negative results to seasonal behavior bias. After a good summer of gains, like this summer’s bear market rally, investors make portfolio changes and cash in on their gains.
Since 1950, the Dow Jones Industrial Average has booked a decline of 0.8 percent on average. If we go back further in history (since 1928), the S&P 500 Index has averaged a 1 percent decline during September. However, over the last 25 years those losses have more than halved to only minus-0.4 percent.
Those declines seem almost laughable today in a market where stocks go up or down by that much in less than an hour.
You may have noticed that investors' attention has become laser-focused on the jobs data. Unemployment claims, continuing claims, job gains, non-farm payrolls and anything else that smacks of employment or the lack thereof is moving markets dramatically. As you might have guessed, this is the data the Federal Reserve Bank is carefully scanning in order to determine how far the monetary belt needs to be tightened.
Strong labor markets mean higher wage growth in a jobs market where supply and demand are out of balance. Wages are far stickier and therefore more important to the long-term rate of inflation than what gasoline or food prices happen to do this month or next. And since the Fed is data-driven, so are investors.
Of course, no single week or month's data point will move the Fed to cinch or uncinch their tightening belt — that is not the case with the stock and bond markets. From my point of view, it is ludicrous to move stocks up or down 2 or 3 percent a day based on a Thursday or a Fridays' report. The stock market prop desks and algo traders obviously disagree.
What's worse, the numbers are highly inaccurate, according to the federal government's own labor department, since data collection has been hit or miss ever since the pandemic. It is also subject to large revisions sometimes weeks and months afterwards, but no one ever trades on the revisions.
A case in point was the jobless claims for the week of Aug. 27. They came in at 232,000, which was below the estimates for 245,000. Therefore, fewer workers applied for unemployment insurance. That was great for the economy, but terrible for the stock market since it indicated a growing economy and more reason for the Fed to tighten.
Even worse, unit labor costs (think inflation) increased 9.3 percent over the last four quarters, the highest level since the first quarter of 1982. An hour later, stocks dropped more than 1 percent, interest rates spiked and so did the dollar.
On Friday, Sept. 2, at 8:30 a.m., the non-farm payrolls report beat estimates slightly (315,000 jobs gained in August), while the unemployment rate ticked up from 3.7 percent versus the expected 3.5 percent. Average hourly earnings month-over-month dropped, as did average hourly earnings, year-over-year came in at 5.2 percent versus 5.3 percent expected. Downward revisions from prior months labor gains helped improve the mood as well.
The markets deemed this a "goldilocks" report, so the algos bid up stocks and bonds, sold the U.S. dollar and interest rates fell; all in the pre-market. I wouldn't take any of these gyrations seriously. I put it down to traders looking for any excuse on a slow week before a major holiday to improve their trading profits.
As predicted, the S&P 500 Index hit 3,900 this week. That was the upper end of my target range. I was looking for a decline with a range of 3,800 to 3,900. I had been warning investors that the bear market rally we had enjoyed since June 2022 was ending. I expected that we would give back most, if not all, of that rally in the September into October timeframe. We are right on schedule. Now what?
Expect a bounce to as high as 4,030 in the first half of next week, and then a further decline to the low 3,800s. The stairstep of lower highs on rallies, and lower lows on declines is playing out just the way I expected. The question I have been asking myself is will stocks hold those levels, or are we destined to re-test or possibly break the June lows. Stay tuned for next week's columns, and in the meantime enjoy the three-day weekend that marks the unofficial end of summer.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: The Supreme Court Loves Business
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Over the past seven decades, the U.S. government has embraced business. Both political parties and their leaders have continued and expanded a broad, business-friendly agenda. However, the judiciary tops the list when it comes to ruling in favor of American business.
In fact, the current Supreme Court of the United States (SCOTUS) appears to top the tape in handing down favorable decisions to corporations and small business, according to a research paper by the Virginia Public Law and Legal Theory Research. The authors, Lee Epstein of the University of Southern California, and Mitu Guli at the University of Virginia School of Law compared the last decade and a half of Justice John Roberts' court rulings. Businesses won a lot more cases than they lost. The authors concluded it may well be the most pro-business Supreme Court in the last century.
Historically, SCOTUS has only ruled in favor of businesses 41 percent of the time. In the Roberts Court, however, that number shot up to 83 percent in 2020, and 63 percent since John Roberts assumed the role of Chief Justice.
If you look at the makeup of the court right now, six justices with the best record for supporting businesses in their voting habits were nominated by Republican presidents. That list includes Clarence Thomas, Samuel Alito, Brett Kavanaugh, Amy Barrett, Neil Gorsuch, and John Roberts.
However, that does not mean that Democrats' appointees are anti-business. Elena Kagan, for example, has a better pro-business record than Antonin Scalia. Sonia Sotomayor ranks last of the justices at 48 percent in favor of business but that is still above the historical averages. The areas in which the Court has actively ruled in favor of business are in the realm of upholding arbitration clauses and denying class-action suits in the securities sector.
The study found that there were several factors that may be influencing the justices' decisions in coming down on the side of business. Government, for example, has a strong influence on the court's decisions. When the Solicitor General, whose office represents the Federal government in front of the Supreme Court, takes an interest in a case, the court listens. It just so happens that the Solicitor General has rarely (20 percent of the time) opposed business interest during the Roberts Court and neither has the Court.
Over the last few years, there has also been a change in who pleads the case of businesses in front of the Court. A small, but savvy group of elite attorneys with extensive experience before the Court, are now representing business 77 percent of the time. That compares to just 25 percent of business attorneys during the Burger Court between 1969 and 1985, when voting in favor of business was much less common. And whether a justice was appointed by a Republican or a Democrat, they were more likely to vote in favor of businesses represented by a SCOTUS-experienced lawyer.
It is a common belief that through the years, SCOTUS had done a fairly good job tracking public sentiment. However, in the case of business, while public opinion toward business has soured, the courts' decisions have gone the other way since the 1960s. Recently, the Court seems to be willing to ignore, or in some cases, even go in the opposite direction of prevailing public sentiment.
In any case, given that the Republican-nominated justices represent a six to three majority on the court, businesses can continue to count on even more favorable rulings in the years ahead.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: Bad News from Jackson Hole
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Federal Reserve Bank Chairman Jerome Powell set investors straight at the Fed's annual Jackson Hole symposium. He said the job of lowering inflation is not done, and that the Fed will continue to raise interest rates in order to slow the economy.
"We must keep at it until the job is done," Powell said, during his speech.
That was enough to send stocks lower after a few days of gains. At the same time, the U.S. dollar fell, as did interest rate yields, which is somewhat counter intuitive given Powell's hawkish statement. The inflation data released on Friday morning showed a little progress on the fight against inflation. The Personal Consumption Expenditure Price Index, (PCE), a closely watched indicator, eased to 4.7 percent, slightly below forecasts of 4.8 percent.
Month-over-month, the PCE index increased by 0.2 percent in April, which was much lower than the 0.9 percent rise in March 2022. Lower inflation in investors' minds means the Fed does not need to tighten monetary policy as much. That would translate into less downward pressure on the economy and better corporate earnings. Powell said we are not at that stage quite yet.
On the economic front, the data continues to conflict. U.S. second quarter GDP was revised upward this week from minus-0.08 percent to minus-0.06 percent. As readers may know, Gross Domestic Product measures the value of goods and services. Another data point the Fed follows closely is a subset of GDP called Global Domestic Income (GDI). GDI measures the progress of labor income. That number gained plus-1.4 percent in the second quarter of 2022.
Most economists tend to average these two variables together in order to get a better picture on how the economy is really fairing. If we do that, GDP in the first quarter 2022 would have been a gain of plus-0.1 percent and a positive 0.4 percent in the second quarter, instead of two negative quarters in a row, according to headline GDP. Granted, both quarters would still be below the long-term trend of GDP, but not quite recessionary just yet.
However, rising interest rates are impacting economic growth. The latest Job Openings and Labor Turnover Survey (JOLTS) report, for example, showed that job openings have fallen by 1.1 million between March and June 2022.
Indexes based on online job listings, compiled by two job search engines, Indeed and LinkUp, suggest that the trend in job openings continued to decline in July and August. Other economic data that shows a decline is pending home sales, that are now down 22.5 percent, versus last year, and durable goods orders are flat to down. That data should encourage the Fed in their efforts to slow the growth in the economy.
The gains in the market this past week were expected. Stocks lost 2.4 percent in three days and then bounced. Gains pushed the S&P 500 Index up to the 4,200 level before rolling over. The way things are set up right now, we should see the market bounce up somewhat for a day or so next week, but I expect a series of lower lows by the end of next week. The bounces we get will disappoint and fail to make higher highs. That is my best case. If things get out of hand, we could just continue to drop down to 3,900 on the S&P 500 Index. In any case, my playbook for September into October 2022 is down.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
The Retired Investor: Consumers Get Price Relief on Beef
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Many consumers have changed their diets over the last two years consuming more chicken, pork, and fish and less beef. Driving this substitution have been the stratospheric increases in meat prices. The good news is that high-end beef cuts are now dropping in price.
As readers are aware, prices for food have been rising for months. On a personal basis, my custom of grilling outside at least once or twice a week is just not the same. The prices of steak — sirloin, rib eye, New York strip and steak tips — forced me to switch to chicken kabobs, hamburgers, hot dogs and maybe a cut of London broil.
Beginning in August, however, I noticed that some supermarkets were running sales on some high-priced cuts of meat. Checking prices nationwide, I discovered that prices for rib-eye and beef loin are down nearly 10 percent compared to a year ago. Beef brisket has dropped by more than 18 percent.
On the other hand, ground beef prices, usually the cheapest choice of beef for consumers, increased by 7 percent over the same period. That is understandable from my point of view. I began substituting ground beef for prime rib and other expensive cuts of meat well over a year ago, as have many other shoppers. I suspect my wife is getting sick of eating my meat loaf, and I don't blame her.
I would like to think that the economic concept of product substitution is at work here. The idea is that a customer will substitute a preferred product for another product with similar characteristics. Consumers are increasing demand for ground beef and reducing their demand for high-priced beef cuts.
In this case, substitution occurs due to the large price deferential between the two products. At some point, as supply becomes greater than demand, prices should fall and they have. Meat processors argue that bottle necks had caused the price declines and not price gouging.
The tight labor market and higher employee turnover and absenteeism due to COVID-19 has eased somewhat since last year due to higher wages and fringe benefits, although it is not yet back to pre-COVID levels.
Climate change is another reason for higher beef prices. Drought has forced ranchers to push more cattle into processing plants as drought, high heat, and the price of feed forces the size of herds to be reduced. For example, thousands of cattle in Kansas died in June as a result of excessive heat. Cattle prices are up 15 percent versus 2021, for ranchers, but so has other expenses like feed fertilizer and fuel, so producers are struggling to just break even.
I wish I could predict that meat prices will continue to decline but that doesn't seem to be the case. Prices may see a temporary decline, but only if ranchers continue to reduce their herds. Industry experts and the USDA are forecasting that U.S. beef production will decline once again in 2023, and possibly out into 2024. The law of economics would say, as beef supplies dwindle, processors will be paying (and passing on to you) higher prices once again.
The morale of this tale is to take advantage of cheaper prices while you can and maybe buy a bigger freezer in the process. In the meantime, any meat lover will tell you that the taste of London broil is a far cry from a juicy, rib-eye, but steak is steak when you're craving beef.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
