Strategy - Is the US economy running out of labour?

Tight labour market a rising challenge to US growth

The main news in the US labour market report last week was a 2.9% jump in wage growth. It was the highest level in close to 10 years and suggests a tight labour market is starting to feed into higher wage growth and thus inflation pressure – something that has been missing so far. However, Thursday's inflation data painted a different picture. US core inflation surprised on the downside, rising only 2.2% y/y in August, down from 2.4% y/y in July. Hence, the jury is still out on whether we are finally getting higher inflation in the US.

However, indicators of tightness in the labour market suggest that US companies are finding it increasingly difficult to find skilled labour (see chart below) – something that typically translates into higher wage growth and inflation eventually.


Even if inflation fails to pick up, it could still prove an obstacle for growth. For companies to keep increasing production, they need more hands. If they face bottlenecks, it could put a brake on growth. Similarly, it would be likely to pave the way for continued higher policy rates by the Fed to stem demand growth and lean against the wind to avoid overheating.

A way to keep strong growth even with bottlenecks in the labour market is by squeezing more out of each worker – in other words, by increasing productivity growth. However, so far there is no sign of rising productivity growth, which is still hovering around 1% y/y, much lower than the 3% level prior to the financial crisis. While US President Donald Trump is stating his policy is already working by boosting growth, there is no evidence that it is raising the potential growth rate of the US economy.

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