Skip to Main Content

Six Pivotal U.S. Labor and Trade Concerns to Watch for in 2017

by Bruce McCain, Chief Investment Strategist, Key Private Bank 04.10.2017

Confidence about improvements from changing policies in Washington has surged. While there are reasons for optimism, public enthusiasm does not always lead to economic success. Here are six things to watch in the months ahead.

Signs of increasing labor shortages

The lack of jobs played a major role in the presidential election. Yet economists believe the U.S. economy is now close to full employment. We also seem to be rapidly moving toward a time when the lack of workers, rather than the lack of jobs, will be a major economic constraint.

Over the last several decades, the growth of the labor force and its improving productivity has kept labor from being a significant restraint on economic growth. As the baby boom generation leaves the workforce, however, labor may increasingly limit how fast the economy can grow.

The labor force enables economic growth to the extent that the number of workers, or the productivity of the workforce, increases. As boomers went to work, labor improvements easily supported growth of 5% to 6%. In the future, based on the projected availability of workers, it may be hard to sustainably grow the economy more than 1% to 2%.

We already see signs that employers are having trouble filling jobs, and so need to keep a close eye on employment trends. A major slowing of the number of new hires would be a very bad sign if it starts to reflect a lack of potential employees.

Pay particular attention to growth sectors

Labor shortages are rarely all or nothing. Instead, they spread across the economy, striking first in areas where demand growth is strongest.

Skilled labor is often particularly hard to hire when the labor pool is limited, and so should provide some of the earliest indications of labor shortages. The ability to hire doctors, electricians, and skilled machine operators can therefore confirm tightening labor constraints. By the time that relatively unskilled labor becomes scarce, the overall shortage of labor will probably be well advanced.

Watch wage rates

When labor becomes scarce, firms aggressively raise wages to get the help they need. They increase pay to hire new help, but are even quicker to raise wages when they fear losing current employees.

Hence, wage rates should accelerate markedly when the labor markets tighten significantly. With those at the mid-point of the baby boomer years slated to turn 65 in 2020, we could be close to a major tipping point. Wages typically rise during the advanced stages of economic cycles, when most of the unemployed have returned to work. A major acceleration, however, could indicate that the broader demographic transformation is taking hold as boomers retire.

Inflationary pressures may be more concentrated in this cycle

Rising wages often lead to higher consumer prices. But not always. Intense competition can keep firms from passing increased wage costs to their own customers. There is strong evidence of excess manufacturing capacity and intense price competition, both in the United States and abroad. That may keep manufactured goods from becoming a major source of inflationary pressure.

The services sector, however, has shown much stronger demand than the manufacturing sector. The dynamic growth of services, combined with the labor-intensive nature of most service firms, suggest that the services sector will be a leading edge for wage increases as labor shortages spread. Both the number of hires and the rate at which service wages rise will be important indicators of tightening, particularly in areas that employ highly skilled service workers (e.g., doctors and engineers).

International negotiations will become more important

While there have been few major effects so far, the reality of Brexit will begin to sink in as negotiations over the separation begin in earnest. The preliminary indications suggest the two sides are still widely separated on the terms for their split. Like most divorces, the separation could cost both sides more than they expect.

Donald Trump may alter those negotiations. Unlike the Obama administration, which warned the U.K. that the United States would focus first on a stronger trade pact with the E.U., the Trump administration seems far more open to prioritizing a bilateral deal with the U.K. A strong U.S.-U.K. trading alliance could offset some of what the U.K. will lose with the E.U. It could also make the U.K. a larger conduit of sales to the United States for some firms in Europe. The tone of the negotiations in Europe will be important for the region and for the world.

Protectionism and trade wars

Donald Trump’s talk about improving U.S. trade deals has stirred concerns that he will provoke trade wars. Although the president is an experienced business negotiator, that experience may not translate to the world of international politics.

Still, tough negotiating positions do not necessarily make international agreements less likely. Some U.S. trading partners impose major trade restrictions on U.S. goods at the same time they enjoy large trade surpluses with us. There should be room for discussion.

Continuing conversations are the best indicator of progress toward agreements. With most of our trading partners, both sides have a lot to lose if trade restrictions escalate. Public complaints about tough negotiating demands will probably not matter a great deal as long as negotiations continue.


Download PDF

Back to Top