Six reasons why the US labour market expansion can continue and benefit equities over bonds

Some commentators have suggested in recent weeks that the probabilities of a US recession and a pick-up in the unemployment rate in 2020 are rising.

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Daniel Casali
Published: 04 Sept 2019 Updated: 13 Jun 2022

Some commentators have suggested in recent weeks that the probabilities of a US recession and a pick-up in the unemployment rate in 2020 are rising. A deterioration in the US labour market matters for investors, as equity performance tends to beat bonds, provided the unemployment rate is falling, and vice versa. However, Daniel Casali, Chief Investment Strategist at Smith & Williamson, has a different view:

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“Our data indicates that the US labour market still remains healthy, so we remain constructive on equities over bonds. Arguably, it is therefore too soon to talk about a US recession.”

Daniel outlines here six reasons for being optimistic:

1) US employment opportunities remain - “Hiring is running close to cyclical highs, while job separations (e.g. workers who quit jobs and those that are laid-off or fired) have largely flat-lined over the past year. The difference between job hires and job separations is more or less equal to the monthly non-farm payrolls, which is a net figure. The bottom line is that there are employment opportunities in the US”

2) Hiring intentions are at record levels - “The Manpower survey, which measures the hiring intentions of 11,500+ U.S. employers, hit a 13-year high in the third quarter of 2019. This shows that concerns over trade protectionism or the economy have not hurt optimism amongst US companies.”

3) Job growth is higher than normal – “The latest non-manufacturing ISM survey employment sub-component, which correlates closely with job growth, is elevated.”

4) Small businesses are confident to employ - “The National Federation of Independent Businesses small business plans to hire survey is not far off cyclical highs and points to faster payroll growth.”

5) Consumers are confident about lower unemployment - “The consumer confidence labour market differential, which looks at the difference between jobs plentiful less jobs that are hard-to-get, tends to lead the unemployment rate. In August this differential rose to a 19-year high and indicates that consumers expect the unemployment rate to fall further.”

6) Labour is cheap – “The share of compensation to GDP at 53.6% is below its long-term average and previous cyclical peaks. The low share of compensation in the economy is likely structural and reflects globalisation and the assimilation of China into the global economy. Given that it is not too costly to hire, firms are likely to continue to expand their workforce.”

Source: Thomson Reuters Datastream/Smith & Williamson Investment Management LLP

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.