There has been a lot of noise lately in the media with a lot of conversation around economic strength or weakness. The one bit of data that is being brought up with conflicting opinions is the unemployment rate.
Currently, the unemployment rate is 3.4%, matching a 50 year low for this number. So what does this mean for the economy? What have we seen historically and how may this play into what we see currently in the market and economy?
Firstly, consumer spending increases. When more people are working, they have the means to spend more. And consumer spending drives a massive part of our economy and growth. So, more jobs often lead to a healthier economy.
Secondly, higher tax revenues. No one likes taxes. But more people working means more people are paying income taxes, leading to higher tax revenues for the government. These revenues can be used to fund public services or reduce public debt.
Thirdly, reduced government spending. With fewer people unemployed, the government spends less on unemployment benefits, freeing up resources for other areas.
Lastly, potential wage growth. A low unemployment rate can lead to increased demand for workers, which can put upward pressure on wages as companies compete for a smaller pool of potential employees. We have seen a lot of this over the past couple years.
However, it's important to note that extremely low unemployment can lead to labor shortages, forcing companies to pay higher wages. This could lead to increased costs for businesses, potentially resulting in higher prices for consumers which leads to inflation. We have also seen this over the past couple years. The answer to this is automation, which we are starting to and will continue to see a lot of as businesses grow in a low unemployment environment.
Overall, historically, low unemployment tends to be associated with a strong stock market, as both are often indicators of a healthy economy. However, the relationship between unemployment rates and stock market returns is complex and influenced by many other factors.
It's important to note that while the unemployment rate is a useful economic indicator, it doesn't necessarily predict future stock market performance. Market returns are influenced by a wide variety of factors, including corporate earnings, interest rates, geopolitical events, and investor sentiment. 2022 was a perfect example of this. We had low unemployment throughout, however, rising interest rates, a war in Ukraine, and overall fear in the market drove the markets down.
The key takeaway is that while low unemployment can be good for the economy and the stock market, it's only one piece of a much larger economic picture. We will see how the unemployment data continues to play out the remainder of the year. But I like when unemployment is low, I like when people have jobs and have money to spend.