The US Stock market just recorded it's 7th worst year in the last century, down a painful 18.1%.
(chart credit Ben Carlson, awealthofcommonsense.com)
The last several weeks we have seen more layoffs from firms such as Amazon and Salesforce, and expectations of more layoffs are under way as we kick of 2023.
Interest rates are near the highest levels we have seen in decades, freezing the housing market and sending mortgage rates to levels not seen since 2001.
But even with several of these troubling statistics - the overall economy is still doing fine.
Why is that?
The answer lies within the job market. But not just because of the current employment landscape.
Yes, we are seeing layoffs.
However, the Wall Street Journal reported 79% of those workers recently hired after a tech lay-off found their role within 3 months of starting their search.
The unemployment rate currently sits at 3.7%. That's incredibly strong. We also must remember that the Technology industry which has been the primary focus of these layoffs, went through record levels of hiring over the past several years, and also still makes up a very small % of the overall employment market. (~8%). To put things into perspective, the 18,000 people laid off last week at Amazon and Salesforce made up about .02% of the overall TECH industry, making its impact on the overall market undetectable.
So why is the labor market remaining strong even if companies are concerned about slowing earnings and rising interest rates?
The answer is not necessarily in the rising demand of new jobs. It's in the lower than usual supply of workers.
In 2019, 63.9% of Americans were working.
In 2023, 62.3% of Americans are currently working.
That equates to ~4 MILLION workers missing from the workforce. (Data from Y Charts)
Even though we are seeing some of those workers start to come back, we have a very serious and structural labor shortage that many argue was beginning to show itself even before the covid pandemic.
With this in mind, I believe this will continue to make the economy very confusing to digest in the years ahead. Even if economic activity slows, people will still have jobs. And if people still have jobs, they are going to be okay.
The Federal Reserve up until this past year had a difficult time even getting the inflation rate above 2%. The last 10 years, it averaged 1.88%. Now, they are struggling to combat inflation as it has been at levels not seen 1982.
I predict that inflation will shortly no longer be the concern of the Federal Reserve in the coming year. supply issues have opened up, and the impacts of significantly raising rates in the speed in which they did are already starting to show slow downs in consumer's spending activity.
The challenge for the Federal Reserve however will be how to accurately assess the health of the employment market, since it is structurally different than it has been historically. Continuously raising rates to try and see the employment number "soften" to higher levels of unemployment may not happen, unless the economy falls into a seriously deep and dark state from an event unforeseen currently.
Yes, we saw GDP drop in 2 consecutive quarters last year.
Yes, the S&P500 fell below 20% from its all time highs, officially putting it into a bear market.
Yes, the news is covering layoffs daily.
No, people are not losing their homes.
No, people are not selling their stocks and hopeless about the stock market.
No, people are not unable to find a new job if they were let go.
No, this is not your father's recession.