MAY. 26, 2021
The Conference Board’s consumer confidence index was largely unchanged in May at 117.2, as the present situation component moved higher while expectations fell. The inflation outlook ticked up and buying plans were broadly lower, but, in another sign of COVID’s fading impact on activity, more respondents characterized business conditions as “normal” than at any time in the last dozen years.
The big story, though, was the surge in sentiment around employment availability. The spread between the jobs plentiful and jobs hard to get metrics shot up by a record 13.0 points to 34.6, a level exceeded only in the late 1990s/early 2000s and late 2010s. These numbers mesh with the recent jump in job openings and add to the narrative that labor is rapidly becoming a seller’s market.
This is, of course, coming at an usually early stage of the cycle. Labor market sentiment tends to bottom early in expansions and then rises steadily before peaking just prior to recessions. In this case, however, the unique circumstances surrounding the pandemic (reopening, a rapid snapback in demand and, at the margin, some hesitancy to reenter the labor force due to the virus and/or generous unemployment benefits) have greatly pulled this dynamic forward. Much of this will fade as the pandemic continues to recede, but it should be stressed here that there will still be significant cyclical and structural forces weighing on the labor supply long after the idiosyncratic factors diminish.
Cyclically, the economy is well set up for another lengthy expansion given the Fed’s accommodative monetary policy stance and the feedback loops that are already well in train. It is no coincidence that the tightest labor markets in recent decades (late 1960s, late 1990s, late 2010s) came at the tail-ends of extended cycles. Structurally, the labor force participation rate has been in a general decline for more than two decades, a trend that could well be exacerbated going forward by lifestyle choices in the wake of COVID (note the sharp rise in the quits rate over the past year). The labor shortage isn’t quite as acute as some of the recent data points might suggest, but the fundamentals for a more lasting imbalance as this cycle plays out are already taking shape.
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