Long the cycle, short the complacency

Research evidence excerpt

Long the cycle, short the complacency

et: Firming, not overheating

If earnings are the engine of this cycle, the US labor market is the transmission mechanism –

and it seems to be working. May payrolls surprised to the upside for the third straight month.

The three-month moving average of nonfarm payrolls is now up nearly 200k from the three

months ending in February. Job gains are more broad-based across sectors, including

government, leisure and healthcare. After rising ominously in H2 25, the under-employment rate

has dropped this year. Continuing claims have trended lower, and initial jobless claims remain

subdued. Taken together, the signal is unambiguous: the labor market has bottomed.

The natural worry is that a tightening labor market feeds back into inflation through wages. It is

a concern we believe is premature. Neither the Atlanta Fed's Wage Growth Tracker nor the

Employment Cost Index is flashing the kind of acceleration that would force the Fed's hand. The

unemployment rate has largely hovered around 4.3-4.4% for almost a year, instead of dropping

quickly. This is a labor market that has stabilized, but not one that is running away from the

central bank. At least for now. There is a tendency in macro analysis to treat any improvement

in employment as the opening act of an overheating story. We think that framing skips several

chapters. For wages to become a problem, you need sustained tightness: a sub-4% jobless rate,

rising quits, employers bidding aggressively for workers.

We are nowhere near that. What we have instead is an economy generating jobs at a decent

pace, but with enough slack to keep unit labor costs from spiraling. That is a favorable

configuration, not a threatening one. For investors, the implication is straightforward. A firming