Recap & Macro Outlook: Employment

Michael W M Rudd | President & CFA | Portfolio Manager

We continue to focus on US Employment as a harbinger of inflation and, ultimately, an eventual sustained increase in administered interest rates. We also watch Consumer Confidence which has hit a 17-year high and the US Personal Savings Rate which has hit a 10-year low. Both data points are plotted in the first chart. If savings rates are low and confidence is high, then it makes sense that US workers are enjoying a good labour market. This should ultimately lead to higher wages, squeezing corporate profits and pushing prices for goods and services higher.

The US Congressional Budget Office publishes a statistic called the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which is defined as the lowest level of unemployment that will not contribute to inflation acceleration. It is more commonly called the “natural rate” of unemployment. In the chart to the right, we have plotted the regular US Unemployment rate along with the NAIRU and the US inflation rate. Many economists think that the goal of monetary policy should be to employ just enough people so that inflation will not take hold. This is a difficult thing to do. What we have noticed is that the current unemployment rate is now lower than the natural unemployment rate. In the past, when that difference gets extreme (difference between the blue line and the green in the second chart), inflation has taken hold (grey line). Two Fridays ago, the US Department of Labor released the monthly jobs report and unemployment rate dropped again to 4.1%. If the unemployment rate were to fall further below 4% (i.e. in the 3’s), then we would be approaching this extreme level again.

“This means that” we will watch the state of the North American labour market for hints of inflation. Central Banks will ultimately react to inflationary data. This will cause valuation implications for the companies in our portfolios.


Michael Rudd, President & CFA | Portfolio Manager

Pathfinder Asset Management Ltd. | Equally Invested™
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