The four-week average for jobless claims has fallen to new cyclical lows. The claims data may overstate the potential drop in the U3 rate because of the smaller decline in long-term unemployment. The Beveridge curve is looping inwards, but progress remains comparatively slow. Nevertheless, markets have been underestimating the improvement in the US economy.
The prospect of a “phenomenal” announcement on corporate tax cuts did at least help equities to record highs on Friday. Our longer-term target for the S&P 500 – 3,000 by mid-2018 – remains on track. The galvanising impact of the new administration on business investment should not be underestimated. LG, Samsung and Foxconn are all contemplating increased production in the US to appease Trump. Intel unveiled last week a $3.0bn investment in Arizona to develop 5G networks and drones. This will support highly-skilled jobs too.
Indeed, the contribution of the tech sector in creating highly-skilled jobs has been underappreciated. There has been considerable focus (notably during the election campaign) on low skill employment. In truth, the distortion created by strong employment growth in low wage industries has been largely countered by gains in high paying sectors, such as scientific research & development and computer systems & design.
The sluggish recovery in wages owes more to the entrance of new workers from outside the labour force. The latter will eventually ease when the US hits full employment. However, the impact of rapid technological change will persist, and will continue to disrupt existing business models. Any rise in wages is unlikely to cause a material breach of the Fed’s 2% inflation target. The Treasury curve may continue to flatten even as the recovery gains momentum.
Summary
- Slow recovery in wages not an obstacle for equities
- Indeed, impact of tech disruption key to holding inflation down
- Low-skilled jobs not the reason for weak wage growth
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