Labor markets still resilient despite inflation pressures

Sometimes economic good news is bad news for the markets and this was the case with the latest US labor data. With the Fed’s determination to bring down inflation, the latest marginal unemployment increase means continuation of the rate hikes.

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

In Europe the situation is different, with inflation driven mainly by the energy prices and unemployment decreasing, including in Romania, which posted a 0.2% decrease in unemployment in July, with a spectacular increase in hourly labor cost.

In the United States, the latest Nonfarm Payrolls Report did not show the evolution needed for the Fed to change its current policy of raising interest rates. However, the unemployment rate rose to 3.7% marking the first increase in the past six months. Nonfarm payrolls increased 315,000 last month bringing also an increase in participation rate that is now only one percent below the prepandemic levels. These numbers still look too hot in the context of the high inflation. Another indicator closely watched by the Fed is the hourly wage. In August, average hourly earnings for all employees on private nonfarm payrolls rose by 0.3%, to $32.36. Over the past 12 months, average hourly earnings have increased by 5.2%.

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Latest workforce data from Romania is painting a different picture. In July the unemployment rate was 5.2%, decreasing from 5.4% in June. According to INS we have a very high unemployment rate for the youth, 22.8%. But the most spectacular increase was in hourly workforce costs. In Q2 compared with Q1 this year, it increased by more than 8%. Not in all industries it rose the same. The highest increases were in the Energy sectors, 23.79%, followed by the extractive industry – 19.76%, education – 19.67% and financial industry – 16.92%. At the other end of the spectrum is health and social assistance with only 2.78%. This increases the employee costs year on year by more than 11%, still below the inflation rate that is close to 15%.

The workforce landscape in Europe is different from the one in the United States. Though at the EU level the unemployment rate is close – 6% – there are countries that are close to 3% like Hungary, Netherlands, Czech Republic and countries that are at 12% like Spain and Greece. In August we are starting to see a 0.1% increase in unemployment in Germany, and Ireland and 0.3% in Austria. But it is still far from the levels needed to affect demand.

The latest eToro Retail Investor Beat survey shows that rising inflation is the main concern for investors both in the US and in Europe. If we decompose inflation by its main factors we are seeing that in the US, 30% of the increase in inflation is due to the demand side, 42% is on supply and 33% is due to increases in energy prices. Therefore the Fed policy trying to limit consumption and making money scarce is taking some time to unfold. But the same graph for Europe is showing that the percentages are different. Energy influence is 47% and demand side is only 15%. This is putting in front of the Central Banks a more difficult task. The ECB started its interest rate increase policy only in July but is most likely to continue this week with another rate hike that markets are pricing at 0.75%. However inflation pressures continue from the energy supply side and these are harder to solve.