Let's talk about labour

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For financial professionals only

No, not our anticipated new UK government, but the US labour market (or labor market, as our friends across the pond would write).

If you want a good indication of the state of the economy, look at the labour market

Colin Morris

Inflation has been a hot topic and disruptive influence in markets, economies and elections for almost two years.

The European Central Bank was the first major central bank to make an interest rate cut but we’re still waiting for the Bank of England and, more crucially, the Fed, to follow suit.

Fed Chair Jerome Powell has suggested the first interest rate cut could happen before inflation drops to 2%, acknowledging the delayed impact of rate changes on the economy.

US CPI is dominated by housing costs, responsible for roughly 2% of the 3.3% inflation we saw in May. However, the data used for housing calculations (based on household surveys) is flawed and appears to lag behind other housing metrics like the Apartment List Rent Index.

A chart showing the year over year change in apartment list rent index v CPI (rent) v CPI (Overall) between 2019 and 2024

Source: Apartment List National Rent Report

It’s easy to see why focussing solely on the CPI number could lead to the Fed falling behind the curve.

If you want a good indication of the state of the economy, look at the labour market. US unemployment is currently at 4%, in line with the Fed’s expectations for where unemployment will be at the end of the year, although it’s trending upwards from the lows of 3.4% seen last year.

A chart showing the unemployment rate in the US between July 2022 and April 2024

Source: Unemployment Rate (UNRATE)

If that trend continues and unemployment rises further, the Fed may be forced to make more than one interest rate cut this year. If they don’t, their aim for a soft landing – i.e. bringing inflation back to target without causing undue distress to the economy – could be at risk.

Looking ahead to the second half of the year, we believe there will be more opportunities and risks for active managers in the US to navigate these events.

If you’d like to hear more about our investment outlook, follow us on Crowdcast, where you can join regular Let’s Talk Markets webinars and put your questions to the Parmenion Investment team.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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