U.S. labor market facing tight conditions

Current labor market conditions in the United States

The United States’ most recent labor force report has shown that the country’s unemployment rate has reached 3.6% for the third month in a row, one of the lowest levels ever recorded in the country’s history, adding 390,000 jobs in the month.

It is clear that since the early days of the Covid-19 pandemic, the U.S. labor market has recovered strongly into a position of growth. The strength of the labor market has led to negative implications, though, most notably higher inflation.

Implications of tight labor market conditions

The labor market is extremely tight within the U.S., which has supported economic conditions since the onset of Covid-19. The pandemic gave rise to a considerable amount of economic uncertainty. However, two and a half years later, the labor market has not only recovered to pre-pandemic levels but has tightened even further. This has led to labor shortages as employers continue to seek new workers.

One of the significant implications of tight labor markets that are worsening in the current macro-backdrop is inflation. Employers face a shortage of workers, so they must increase wages to attract new workers to fill vacant job openings. There is also growing worker turnover since there may be higher wages at new jobs for workers. This has led to conditions where employers/businesses must increase the prices of products/services to maintain their profitability. Furthermore, the average consumer has larger spending power from the increase in wages, which leads to greater demand and supports higher price levels as well. 

With these inflationary pressures, it is clear why the Federal Reserve is focusing very heavily on lowering inflation expectations across the economy. Too many inflationary pressures left unchecked could lead to out-of-control inflation and detrimental medium-to-long-term impacts on the U.S. economy.

ETFs to play the tight labor market

From the investors’ perspective, to position for a tight labor market, the best way to invest is to position into Equities with strong pricing power to pass on wage inflation increases to consumers

Some examples of equities with strong pricing power within the U.S. are companies within the Healthcare sector and Consumer Staples. Both of these sectors face inelastic demand from consumers, meaning that demand does respond as much to changes in price levels. Some ETFs to invest in are IYH (iShares U.S. Healthcare ETF) and VHT (Vanguard Health Care ETF). 

Furthermore, within the Consumer Staples realm, some ETFs to invest in are XLP (Consumer Staples Select Sector SPDR Fund), IYK (iShares U.S. Consumer Staples ETF), and VDC (Vanguard Consumer Staples ETF).

Data for this article is as of July 5th, 2022.