Is Low Unemployment Good or Bad?

In this episode we jump into unemployment as it continues to make headlines. Is it good? Is it bad? What does it mean for us the rest of this year? We tackle all of it. 

As always, thanks for listening. 

Transcript

Copy

Eddie Thomas: 0:00

Hey guys, what is going on? Welcome to an episode of the modern outlook podcast. Here in our GPA. My name is Eddie Thomas, brought to you by wealth management services. So we're just gonna jump right into it today, because I think the topic that we're gonna dive into today is actually pretty important for a couple of different reasons. And you'll see why it's pretty obvious. So the topic that we're going to have is the impact that low unemployment has had and will continue to have on the market and economy. But then a couple of different things to consider as well. And the reason I wanted to talk about this is because probably for the first time, and a long time, you're seeing unemployment rates come down, and people not be happy about that. You see the Fed come out and say, well, that's gonna raise inflation. So we need to keep raising rates, because unemployment in the labor market is so tight, and we don't know what to do. And they're not being able to fix it right now. But they want to keep raising rates, to push companies pretty much into cutting expenses, the way you cut expenses, is by laying off employees in part. Now, I've talked about this a little bit before, over the past few years, because we've been in this cycle of really low unemployment post COVID, 2021 2022, both pretty low unemployment, and then 2023. And if we're taking a look going forward, businesses right now are showing a lot of resilience with regards to rising interest rates. So it's not impacting on I think, as much as the Fed thought they would. But for now, unemployment in the labor market is both really strong. I mean, the labor market is tight and unemployment is low. So what does that mean for us going forward? What does that mean right now? Well, there's four things to pretty much. Consider when you see unemployment being so low, here's the first. The first is consumer spending typically increases. Anytime you have more people having more jobs are going to spend money. It's just the nature of the beast, high unemployment, less people spending, the economy doesn't grow as much low unemployment, like we have more people spending, economy grows. So it's a good thing for the economy, when people have jobs, spend money and can do what they want to do. And I completely agree, I love when that's the case. I like where we're at right now with 3.4% unemployment. So what we have is the fact that since unemployment so low people continue to spend the issue we had last year with that specific case, is the fact that the supply chain was so messed up last year, for different reasons, that when people had all this money to spend, there was nowhere to spend it. So demand was out, outpacing supply, and our prices went up, leading to more inflation. That'll change, it's starting to change. People still have money, though, because we've saved a lot and unemployment is low. So people have more money in their pocket to spend. So that's the first factor to consider low unemployment means increase consumer spending meets economic growth. Second, unfortunately, taxes aren't that inevitable, and you're never gonna get away from them. It just is what it is. So the second thing is when unemployment is low, there's higher tax revenues. And like I said, No one likes paying taxes. But the more people working and paying income tax, has tired, higher tax revenues for the government, which isn't always a worst thing, because you can try to reduce debt, you can fund other public services, you can do those types of things, if you're the government, which is good, pushing the economy forward, pushing the nation forward. No one likes paying taxes, but a low unemployment means higher tax revenues for the government, again, good problem to have. Number three, low unemployment actually reduces government spending. So the government doesn't have to spend as much on unemployment benefits, and it could free up some resources for other areas of the government to spend into. And it's actually when you think about that, it's funny to, to kind of think back to 2020, because we had such high unemployment benefits that people were losing their jobs because of COVID. And we're actually paying, getting paid more to be unemployed in some cases than they were when they were employed. And for a while there, it got really out of whack. I think unemployment benefits are incredibly essential to making sure that the American families go through a layoff or losing their job, can stay on their feet and push towards the next job, when they get out of whack is when they're getting more money. You're getting more money on unemployment than you were when you were employed, not giving you the push to actually find the next job and for a little bit there we are in that weird spot. Of that was the case. That's not the case as much now, unemployment benefits have come back down to normal. So you're actually having the government having a reduced expenditure and unemployment benefits because of unemployment so low. And the last part is potential wage growth. And we've seen that a ton in the past year and a half, two years, and it doesn't really feel like it or you don't see the headlines as much because inflation has been so high that any wage gains have that have come in, don't always match up with what inflation has. But as inflation comes down over time, those wage gains aren't going anywhere. So people have more buying power over time because of wage growth. But you typically see that when you have low unemployment, you have increased demand for workers, you can have an app puts upward pressure on wages for companies to compete for less employees that are searching for jobs. So you have when people leave their job and find a new role they in the last two years, it was almost guaranteed you're gonna get paid more. And then employees under the same roof can say, Hey, I've stayed here, I've been loyal, I need to pay great, I need a pay bump. And then they're obviously shoved back to that, because the companies that keep them, how do you keep people you pay them more money, you make sure they're happy. wage growth, whether you're changing jobs or staying in the same job, the last couple of years have been a perfect opportunity for wage growth, because unemployment has been so so low. So when we take a look at those four things, a lot of them are good things. However, a couple other things on the other side of the coin to consider as well, low unemployment. And we've seen this can lead to a really tight labor market, when the labor markets are as tight as they are when you can demand as high of wages as you can result in businesses having to charge higher prices, because they're spending so much more money to keep people employed, when someone's wage goes from 50,000 to 65,000. To 15,000, more that the employer has to kind of consider as an expense. So if you're a consumer, on the other side of that, you have to be prepared for higher prices, when you're spending on goods and services, because the people that are supplying those goods and services have to pay more to keep people under the roof to make sure those goods and services are in line. And that's just the unfortunate nature of it. The one thing that will bring that down over time is automation. Here, where I'm at in Central PA, there's a ton of manufacturing Moorehouse was getting not manufacturing, excuse me, there's a ton of just warehouses being put up just the round, I'm sure some are manufacturing, others are just like Amazon warehouses, those types of things. What's funny about that is you're doing so in an employment unemployment market that's so tight that the question becomes how are you going to find people to actually put in those plants to make sure they're operating efficiently? The answer to that is they're going to have more robots to automate a lot of the things that you don't need human physical employees for good and bad with that good. costs come down for consumers long term because it costs less to have a robot operate the job than how a person come in. Bad, long term, long term in those types of facilities, there's gonna be less jobs available for people to take. That might be an issue really long term and unemployment market isn't as tight as it is for now you can see why companies would do so you need to make sure what you're building works, you need to make sure it's operating automation is the way to do so. But overall, what historically have we've seen when we have low unemployment with regards to the stock market in the economy, it typically means a strong economy. And that typically means a strong stock market, not that they're one in the same. But when you have low unemployment and people are spending money, like I said, that leads to economic growth. Economic growth is derived from driven from businesses selling more producing more servicing more, and that leads to higher revenues and profits for businesses. In turn, people invest in those businesses because they're performing well. So when you have loan appointment, you have the part where the economy's really performing well. Businesses are performing well. Both are moving in a positive direction. All is good. 2022 was the caveat to when that doesn't happen. The other side of the coin, you had low unemployment. Businesses were going through a massive supply chain issue. So they weren't performing as well as they'd like. People had a ton of money to spend but notice spending because the supply chain was messed up. So and there was other fears. Obviously at a Russia Ukraine war, inflation hit 9%. Some of it had to do with a change in higher demand versus lower supply. Other that had to do with the with the energy situation that we had with gas being so much more expensive. So there's a couple of different reasons to that. But overall, what you'll historically see is low unemployment means good news for the economy. Good news for the stock market again. 2022 was the one caveat to that won't the market being down, however, wasn't due to low unemployment. It was just due to rise Interest rates are rushing Ukraine more than no one really wanted to see coming, no one knew what to do on the back end of it. And the overall fear in the markets that inflation was too high, that we didn't know what to do with the supply chain that our businesses weren't going to perform as well. So the market was down this year supplied in 2023. So far, supply chain has figured itself out. Companies are operating and doing well they're cutting expenses where they can. And they're operating and doing well on a servicing and the good side of producing and selling. So you're starting to see the market bounce back a little bit in certain sectors and areas. Some of that has to do with unemployment being slow, and people having some money to spend. So overall. Those are the kinds of things we see and look at when it comes to unemployment. It's a good thing for the economy, it's a good thing for the stock market, businesses will figure out how to navigate a tightened labor market. And it won't always be this tight. But going forward, you go through this kind of time you learn what to do, you automate more and then you go forward and more efficient from there. So it leads to good things long term, it leaves the innovation at least a better practices. And I think we're on that path. So rest of the year. I'm hoping unemployment stays low. You'll obviously see headlines around it and you'll see how different companies navigate it, but I think we're on a pretty good track with it. And I hope that continues to be the case. So until next time, guys, stay happy, stay healthy, and I'll see you Securities offered through securities America Inc. Member FINRA slash SIPC. advisory services offered through securities America advisors Inc. Wealth Management Services and securities America are separate entities. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at anytime based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.