On Friday June 1st, the Labor Department reported that 223,000 jobs were created and the unemployment rate fell to 3.8%. Teens and minorities have the lowest unemployment rate since measurements were started. Normally, such robust numbers would cause wage inflation similar to what we experienced in the late 1960s and throughout the 1970s. Yet we have not seen any sign of that so far.
There are many theories out, concerning the reason for this unexpected low inflationary push in wages. The belief that I have, is that many people accepted temporary positions, left the workforce, and others became contract workers by default. All of those workers are entering the labor force now, as we witness the employment rate start to rise again. The participation rate continues to hover at around 63% actual for the past year. The participation rate peaked during the dot.com bubble of the late 1990s, at around 67%, and dropped throughout the 2008 recession and recovery, until 2016 when it settled at around 63% for the past 3 years.
The equity markets have reacted to this good news, as the greater the employment, the more wage earners spend, the more our economy grows. Please remember, about 70% of our economy is driven by consumer spending. So right now, we are in the Goldilocks of the economic cycle: Growth continues through increased consumer spending and growing consumer confidence about the economy, with little to no inflation above Federal Reserve interest rate targets.
We don’t know how long we will stay in this sweet spot, but we suggest you enjoy it while it lasts. We do believe the economy and the market will continue to grow for the rest of 2018, unless we experience a war, terrorist act or some other economic shock which we cannot foresee at the moment.