Watching the Economic Recovery? Mind the Activity/Employment Gap

The U.S. economy continues humming along, and while growth is forecasted to cool in the second half of the year, the growth itself is still expected.

For investors keeping abreast of the situation, one lesson from the first half of the year should be remembered. More experts and policymakers are going to be focusing on the labor scenario going forward. Many market observers are concerned about how long can the world’s largest economy can grind higher amidst noticeable labor shortages.

“At we start the second half of 2021, the gaps between the current level of economic activity and full-employment levels remain large but are shrinking. That indicates the economy should still be able to grow at an above-trend pace for at least another year. Expectations remain high for a surge in activity in coming months in response to pent-up demand and the return of in-person events,” note Nationwide’s Mark Hackett and Ben Ayers.

In one of the biggest conundrums of this economic recovery, job openings are plentiful, but employers are still struggling to fill roles. Some are offering big sign-on bonuses and elevated wages – costs that are usually passed onto consumers, contributing to inflation in the process.

“Demand is robust throughout the economy, but many industries have been limited on the supply side. For example, job openings are at an all-time high, but employers are having trouble filling them; orders are rising rapidly for both manufacturing and service industries, but so are delays in supplier deliveries,” write Hackett and Ayers.

For now at least, equity markets appear at peace with the still unsolved labor riddle, as stocks traded higher in the second quarter, delivering clues that more imminent upside could be on the way.

“In the markets, stocks broke out of a tight trading range to reach fresh record highs at the end of June. The factors impacting the stock market remain consistent, with the bulls pointing to the fiscal and monetary backdrop, economic re-openings and accelerating earnings. Bears are focused on inflation pressures and elevated valuations,” add Hackett and Ayers.

Going forward, equity market naysayers are likely to harp on inflationary pressures while all participants are waiting on clues from the Federal Reserve regarding when interest rate tightening will commence.

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