The labor market
The state of the labor market, like inflation, directly impacts the citizens of a nation. In the US, fostering maximum employment is one of the two mandates of the Federal Reserve. The other mandate is maintaining price stability.
A low unemployment rate indicates a strong economy. Jobs will only be announced when businesses are sure about a rise in orders for their goods and services. Also, a low unemployment rate also ensures inflationary pressures in the economy. This usually goes hand-in-hand with growth. A stable unemployment rate doesn’t put undue pressure on inflation—upward or downward.
It also indicates that people are employed. This gives them spending power. With more people working in a household, along with wage increases, people are more likely to spend on discretionary items and services produced and sold by companies like Walt Disney (DIS), McDonald’s (MCD), and Time Warner (TWX). Their stocks account for ~14.60% of the Consumer Discretionary Select Sector SPDR ETF (XLY).
In Part 1 of this series, we saw how consumer spending is crucial to several economies. As a result, a low rate of unemployment, along with falling labor market slack, can increase consumer spending. This is positive for the economic output.
Along with economic output, a strong labor market also has a bearing on monetary policy. Central bankers keep a close eye on the labor market’s metrics. A low unemployment rate makes policymakers confident about the underlying strength of the economy that could be at the cusp of a rise in growth after a slowdown. In the US, the Fed is broadly happy with the labor market. A rise in inflation is expected to result in a liftoff in the federal funds rate. This could have implications on the fixed-income markets (AGG).
Apart from the unemployment rate, there’s another indicator that’s important—net exports.