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Posted on MAY 11, 2018

Johnson Bank Wealth Weekly Investment Commentary | Friday, May 11

This is part of an ongoing series of Weekly Commentary articles published by Johnson Financial Group.
This week's issue is written by Brian Andrew, SVP, Chief Investment Officer.

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Not Your Father's Labor Market

My father was a manufacturing manager in Milwaukee during his entire career. During the late 1980s, the lighting manufacturer he worked for closed plants that had been running in Milwaukee for more than 70 years and moved production to Mississippi and South Carolina. After examining the opportunity to move with the company, he decided to keep the family here. So began his sojourn through the end of the Midwest's industrialization boom.

Those jobs eventually moved to China. The company still exists, and recently they've begun moving some jobs back to South Carolina. However, in his day, the plant employed almost 1,000 people. Today, the manufacturer makes three times the product with one‐third the work force. This is only one example of the changes taking place in the U.S. workforce. Given the current administration's focus on trade and the recent news about a cycle record low unemployment rate, it is worth taking a look more closely at the job market to gain an understanding of its dynamics and impact on the economy and markets.

Unemployment News

Last Friday, we received the monthly unemployment report which provides new information about how the U.S. labor market is faring. The unemployment rate dipped below 4% for the first time since 2000. The number of non‐farm payroll jobs created during the previous month was 164,000, and the average hourly earnings growth rate over the previous year was 2.6%. That's the summary of the headline data. This report is compiled by the Bureau of Labor Statistics—part of the Department of Labor, a government agency that generates data on the U.S. job market. You can find a plethora of information here.

One of the bright spots in last week's report was the growth in manufacturing and construction jobs. Of the 164,000 jobs created last month, 41,000 of them were in these two industries. That's 25% of new jobs. Given that those two industries represent only 20% of the economy, this implies that they are adding jobs at a faster rate. And they are, today. However, over the last 20 years, the allocation of jobs to this portion of the economy has declined precipitously, while jobs in health care, information technology and business services have grown dramatically. Still it seems we are obsessed only with the health of the manufacturing and construction sectors almost to our detriment in some areas of the country.

Manufacturing Employment

One of the reasons for that obsession has to do with the fact that the average wage in those industries (health care, information technology, business services) is higher than some others. Many believe that a return to the manufacturing heyday of our economy, which took place more than 30 years ago, would usher in a new era of economic growth. However, while we'll see improved economic growth from the manufacturing and construction resurgence, we shouldn't become so enamored with it that we forget about the industries that have rallied during the last 30 years, some of which produce even higher wages.

Here is a chart that shows the number of manufacturing jobs in the U.S. over the last 80 years (gray bars on the chart represent recessionary periods). You can see that manufacturing employment in the U.S. peaked in mid‐1979 at over 19.5 million jobs. Perhaps if my father had seen that peak in employment in June of 1979 more clearly, he would have packed us up and moved to South Carolina. The subsequent early 1980s recession resulted in a mass exodus of manufacturing jobs from the Midwest to the South.

You can also see from the chart that there is an accelerated decline from 1998 to 2010. During this period, more than six million jobs disappeared. This period also coincides with the urbanization of China. As it moved several hundred million people to urban areas, companies around the world exported manufacturing jobs to a less expensive workforce, resulting in that accelerated job loss in manufacturing.

After a long decline that lasted through 2009, jobs in this sector of the economy began to rise.

Manufacturing Labor Statistics Graph

Source: U.S. Bureau of Labor Statistics, All Employees: Manufacturing [MANEMP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MANEMP, May 10, 2018.

This is more likely a function of economics than it is fiscal policy. As the Chinese urban population has grown, the demand for better wages, cleaner air and water as well as better living standards has also grown. China is focusing more on its internal consumption than on its export‐driven economy.

This has resulted in a dramatic shift upward in the cost of manufacturing in China, making it less advantageous to produce there. Add to that the increased costs in shipping and the need to shorten supply chains, and you have the economic benefit of jobs moving back to the U.S. With an average hourly earnings rate of about $21, these jobs represent an improvement for consumers who work in manufacturing and construction, but that only represents 13% of the labor force. Let's look at another industry to see where growth has occurred.

Professional and Business Services

The industry called professional and business services has grown from 16.5 million jobs in 2000 to almost 21 million jobs today. With an average hourly earnings rate of about $31, these jobs represent a meaningful part of the U.S. labor market. They represent 14% of the market versus the 8% from manufacturing. The sector has grown by 23% since 2000, while manufacturing has declined by 20%.

Health care, education, professional and business services as well as information technology jobs represent over half of the U.S. labor force. Wage growth in these segments is trending higher, but the inflation rate is much lower than construction and manufacturing which make up less than 20% of the labor force. The transition in our economy from one sector to another changes the way we must think about the labor market and wage inflation. Many are focused on the higher wage growth rate of construction (over 3.5% in this last report) and manufacturing (over 3%) without realizing that each represents a much smaller portion of the economy's labor force. Given the lower wage growth rates in professional and business services (less than 2.5%), the change in the economy's labor force makeup may restrict wage growth.

The economic forces of the last 20 years have reached an inflection point. The demographic benefit of our younger generation will create a benefit in the U.S. relative to the aging work force problems of Europe and China. The energy independence resulting from innovation in that industry will keep costs lower here. Perhaps fiscal policy makers need to acknowledge these changes and adjust policy accordingly.

My father was a big fan of factory innovation. He would have enjoyed the challenges in today's environment. What I learned from him is that you need to expect change, be prepared for it and move forward.

Brian Andrew
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy
to provide consistent, actionable investment solutions for our clients.
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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank, Cleary Gull Advisors Inc. and Johnson Insurance Services LLC. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE


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