by Jeffey Kleintop, Chief Global Strategist, Charles Schwab & Company Ltd.
Shifts in the labor market due to monetary policy tightening would see lagged effects that may not aid central banks' efforts to materially affect core inflation by year's end.
Shortages to gluts
"In the past, the markets seem to have moved suddenly from a shortage to a glut. After a year of supply shortages, we may be closer to the end of the supply chain problems than the beginning. As a leading economic indicator, markets tend to look six-to-12 months ahead; they may soon begin to consider the possibility that some shortages may have started to ease, and gluts may have started to form by the second half of next year." – "Will Shortages Lead to Gluts?" published on November 8, 2021.
Sure enough, by the middle of 2022 gluts of inventory had formed at retailers and manufacturers around the world. The inventory-to-sales ratio at general merchandise retailers in the U.S. soared to the levels that had not been exceeded since the failure of Lehman Brothers in the fall of 2008, according to company sources. The Purchasing Managers' Index (PMI) survey of manufacturers' inventory levels in Europe reached a record high according to PMI data by S&P Global. Companies ranging from Walmart to Nike warned about the need to cut excessive inventories as they reported second quarter 2022 earnings.
Shortages to gluts: jobs
Source: Charles Schwab, Bloomberg (TA) data as of 5/1/2023.
Mentions on corporate shareholder communications for companies in MSCI World Index.
“Job cuts” terms: job cuts, reduction in force, layoffs, headcount reduction, employees furloughed, downsizing, personnel reductions
“Labor shortage” terms: labor shortages, inability to hire, difficulty in hiring, struggling to fill positions, driver shortages
Tighter bank lending
Tighter credit leads to weaker job market: U.S.
Source: Charles Schwab, Federal Reserve, Bureau of Labor Statistics, Bloomberg data as of 5/7/2023.
C&I Loans refer to business loans made to Commercial and Industrial businesses.
Tighter credit leads to weaker job market: Europe
Source: Charles Schwab, European Central Bank, Eurostat, Bloomberg data as of 5/7/2023.
Services key to job outlook
Services exceeding manufacturing by widest-ever gap
Source: Charles Schwab, S&P Global, Bloomberg data as of 5/7/2023.
Services are more labor-intensive and employ more people than manufacturing, which tends to be more capital-intensive. For example, in the U.S. private sector there are 112 million services jobs in comparison to 13 million manufacturing jobs, a ratio of about 9-to-1, as of April 2023. In the European Union, the ratio is lower, at about 4-to-1, but still overwhelmingly tilted towards services, per Eurostat data.
Services jobs vastly outnumber manufacturing jobs
Source: Charles Schwab, Bureau of Labor Statistics, Eurostat, Bloomberg data as of 5/7/2023.
The record-wide gap between growth in services and weakness in manufacturing suggests an imbalance that may need to readjust. It may be the strength in the services economy—and therefore jobs—if the lagged impact of bank tightening begins to have more of an impact.
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