At a nice restaurant I saw the sign, “Patio is closed until further notice due to a labor shortage.” This was not the first time I had seen such a sign, so I reached out to a fast-food restaurant owner. He told me that though he has been busier than ever, he may have to close down because he can’t find employees. I asked why he doesn’t just raise wages to attract new people. His answer was that he is currently offering $20 an hour for entry level employees, and still can’t hire enough help.
All of this is quite remarkable given the high unemployment rate that still exists, recognizing the employment numbers are skewed because they only count people who are actively looking for work. One must wonder how “actively” they might be looking if unskilled jobs are paying $20 an hour and going unfilled. Confusing the matter more, this week the labor department announced that filings for unemployment unexpectedly went up. A major outlet ran the headline. “Economists baffled at rising unemployment in light of a recovering economy.” I am not an economist, but like many others, I am certainly not baffled by what is a major cause of the problem.
In March congress passed the American Rescue Plan. Among other things the legislation extended unemployment benefits as well as an additional $300 per week bonus to those who remain unemployed, though “actively” looking for work. Generally speaking, that means a person who earns $30,000 per year would get paid more to stay home. Human nature teaches that many will accept that offer resulting, not in a labor shortage, but a laborer shortage.
The repercussions of this shortage will extend into the pocketbook, and investment portfolio, of every American. My restaurant owner friend told me he raised prices 30% to cover the added costs. So much for the 4.2% inflation numbers that were just released. Sorry folks, but when the entity that releases the inflation rate also benefits by it being very low (talk to your grandparents about how Social Security payments work) then it’s very difficult to trust the number.
When companies struggle to hire good employees, the supply side of the economy gets squeezed. Labor shortages slow production, increase prices and reduce corporate profits. We have already been seeing this for a while. Just ask any contractor about the price and availability of many building supplies.
The economy, and the stock market that follows it, are poised for a strong recovery as the country reopens post-pandemic. There is significant pent-up demand for goods and services, travel and leisure, automobiles, restaurants and more. From my perspective the biggest risk to the recovery that investors should watch very closely, is coming out of Washington. Politicians with good intentions, or not so good intentions, are trying so hard to “rescue” America, they may wind up sinking her again. At this point in the cycle the American economy is perfectly capable of rescuing itself.