| Uri Greenfeld, Chief Strategist of Psagot Investment House
The February report in the US was better than expected in almost every possible aspect. First, the US economy added 678,000 in February – much more than expected, which stood at 423,000 jobs. Their, when in the last six months the average monthly job increase stands at 582 thousand, despite the rapid spread of the omicron wave.
Second, 304,000 people returned to the labor force, bringing the participation rate up by 62.3%. The participation rate is still low relative to its pre-Corona level, but in recent months has certainly seen an improvement. Third, despite the increase in the labor force, The number of workers in the American economy increased by 548,000 – so that it decreased further from 4% to 3.8%.
Fourth, and perhaps most importantly, despite all the positive points raised about the state of the U.S. labor market, my hourly rate did not rise as it did in previous months, and its annual growth rate fell from 5.5% to 5.1%.
Earlier this year we wrote about the riddle of the American job market, and it seems that in the coming months this riddle will finally become clear. It should be noted that the shortage of workers in the U.S. over the past year – the same shortage that led to a sharp rise in wages and the Fed’s concerns about demand inflation – could be the result of structural or cyclical factors.
If there are structural factors (changing the work function versus leisure of the Americans, accelerating the gig economy and / or mismatching workers’ skills to the technological world), then the shortage of workers will last a long time until employers adjust to the new world. The interest rate quickly and sharply. On the other hand, if these are mainly cyclical factors (huge savings accumulated as a result of the money that the government gave to citizens during the Corona period and fear of the health risk of going to work), then at some point a large proportion of workers will return to work. The interest rate will fade.
The February wage data, as well as the sectoral breakdown of jobs, showing that many “battered” sector workers are returning to work, may be the first swallow to the fact that the U.S. labor market is likely to suffer mainly from cyclical disruption, rather than structural changes.
If it does become clear in the coming months that this is the case, then investors in the capital market will be happy to spread a red carpet in honor of Zehava’s return to the economy. The term “gold economy” is taken from the book “gold and the three bears”, and refers to an economy that is not too cold (not in recession) and not too hot (without significant inflation).
The world situation where inflation is no longer threatening and the economy is growing at a reasonable pace is the most favorable world situation for investment, as it allows for an increase in firm profits without too tight a monetary policy. Although it is too early to decide, probably as long as the war in Ukraine makes a name for itself in commodity prices, but towards the end of the year, inflation worldwide is likely to start fading against three trends: the first is reducing various corona restrictions Global transportation. The second is that it is likely that different countries in the world will work to increase the supply of energy and agricultural goods (even if not to the extent that compensates for the shortages created by Russia and Ukraine, then prices will not rise by tens of percent). The third is that the labor market will recover and the wage pressures will subside.
The return of inflation to reasonable levels will allow the Fed to get off the gas and the markets to deal with below 2%, which will return investors’ appetite for high risk.
Last week we wrote that the effects of the war in Ukraine on the Western economy are insignificant. As soon as the same review was published, they began to come up with a system of abusive conversations, some of which were matter-of-fact and wondered how it could be said that at $ 120 a barrel it was insignificant, and some simply accused us of collaborating with Putin.
We will not elaborate on the second case, and will just note that writing these lines buried deep in the closet the shirt of the Russian team he bought at the 2018 World Cup and hopes that next time he has the courage to wear it, it will still be in the right size.
As for the first case we will expand a little more. There is no doubt that the rise in energy prices and agricultural commodities is significant, but its impact on the Western economy, and certainly on the profitability of firms, is much less. First of all, even before the war in Ukraine, inflation around the world raised its head – so an average increase of about 0.5% to inflation (more in Europe, less in the US) as a result of price increases is not critical in the sense of changing central bank monetary policy.
True, every tenth percent of inflation erodes consumers ‘purchasing power, but for a moment it has not been argued that the war will not cause a certain slowdown, only that it does not justify sharp declines in firms’ profitability.
To what extent will the increase in the price of fuel cause the Israeli consumer to reduce his clothing and footwear purchases? To what extent will this affect the real estate market? The banks? Probably not too much.
In addition, as in any event, there are sectors that may benefit from what is happening, such as the energy, technology and communications sector, and perhaps even residential real estate (depending on the number of refugees the country will absorb). From environmental warfare it is certainly an extreme scenario), the impact on economies in the West is mainly reflected in rising commodity prices, and this impact is not significant enough to lead to a continued decline in stock markets.
On the other hand, if we look for a moment at non-Western economies, the language of the picture is completely different. Many countries depend not only on Russian gas and oil, but mainly on wheat that comes from Ukraine and Russia. Turkey, Egypt, Tunisia and African countries like Nigeria and Kenya, are the major wheat importers from Ukraine and Russia, and are certainly in trouble.
Which countries are exposed to war in terms of food security?
In economies, the effect of agricultural commodity prices on inflation is much more significant than in developed economies (both the weight of the food item is higher, and the share of the commodities themselves in the pricing of final food products). Therefore, the fact that the UN food price index first returned to the level it was at in late 2010, raises concerns about riots and civil unrest, similar to those that occurred during the Arab Spring.
The author is the chief strategist of Psagot Investment House and has no personal interest in the review. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.