Visualized: The State of the U.S. Labor Market
The last time the U.S. labor market was this strong was in 1969.
Unemployment fell to 3.3%, incomes were soaring to historic levels, and inflation was rising at a fast clip. Like today, the Federal Reserve was tightening monetary policy to stifle inflation. Yet much of the wage increases were washed out by rising consumer prices.
The above graphic looks at the industries driving today’s robust job market using data from the Bureau of Labor Statistics . Later, we look into the impact on inflation, and whether today’s market can be sustained.
What is Driving the U.S. Labor Market?
Broadly, service-led industries witnessed the highest share of job growth in January.
Still, as the table below shows, a key part of the services sector—leisure and hospitality employment—remains under pre-pandemic levels. A similar trend is seen in retail services.
|1||Leisure and Hospitality||128K||-495K|
Education and Health
Professional and Business
|12||Mining and Logging||2K||-55K|
Adding 1.5 million jobs since 2020 is professional and business services, the highest overall. This sector covers legal, accounting, veterinary, engineering and other specialized services.
We are also seeing strong gains in transportation and warehousing. Last year, the sector added an average of 23,000 jobs, totaling almost 955,000 over the course of the pandemic. Today, trucking jobs exceed 2019 levels and warehouse employment is roughly 50% higher .
Although manufacturing hasn’t seen the highest gains, the sector has one of the lowest unemployment rates across job sectors, at 2.4%. Yet the industry faces an acute labor shortage—if every skilled unemployed worker were to fill open job vacancies, a third of jobs in durable manufacturing would remain open.
Cooling Wage Growth
Despite rock-bottom unemployment numbers, wage growth is slowing. In January, it fell to 4.4% annually, down from a multi-decade high of 5.9% in March last year.
At the same time, wage growth falls below inflation by about 1%.
Wage growth is carefully watched by the Federal Reserve. Typically, their annual wage growth target is 3.5% to be compatible with 2% inflation.
In the current environment, this wage growth trend serves as a double-edged sword. As wage growth slows, workers are less likely to see wages keep up with inflation. On the other hand, slower wage growth could help prevent inflation from rising in the first place—and interest rates from climbing higher.
Where is the Job Market Heading?
The question on everyone’s minds is whether today’s job market will stay resilient.
According to Fitch Ratings, slowing aggregate demand in response to higher interest rates will begin to weigh on the U.S. labor market, and the 517,000 new jobs created in January—three times the level expected by analysts— won’t last long.
Eventually, both higher borrowing costs and elevated compensation costs could weigh on corporate profits. On the other hand, the pandemic has changed the labor market. Relief legislation may continue to buoy the job market and workers may also remain scarce as people retire or leave for other reasons.
Given how unemployment serves as a lagging indicator , the material effects in the economy will likely appear before cracks begin to show in the U.S. labor market.
Timeline: The Shocking Collapse of Silicon Valley Bank
Silicon Valley Bank was shuttered by regulators becoming the largest bank to fail since the height of the Financial Crisis. What happened?
Timeline: The Shocking Collapse of Silicon Valley Bank
Just days ago, Silicon Valley Bank (SVB) was still viewed as a highly-respected player in the tech space, counting thousands of U.S. venture capital-backed startups as its customers.
But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run.
So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list .
Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet.
The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued.
Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits.
By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years.
In 2021, U.S. venture capital-backed companies raised a record $330 billion —double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy.
Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.”
|Year||U.S. Venture Capital Activity||Annual % Change|
Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low.
During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice . In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses.
In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
|Name||Stock Price Change, March 10 2023||Unrealized Losses / Tangible Equity|
|First Republic Bank||-15%||-29%|
|Fifth Third Bancorp||-4%||-38%|
|Bank of America||-1%||-54%|
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
The whole sector is in crisis, and the banks and investors that support these assets are going to have to figure out what to do. -Christopher Whalen, The Institutional Risk Analyst
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