Stock markets dipped when Jay Powell indicated on Wednesday that there was no clear path to a rate cut. Two days later, the FOMC chair was vindicated, even though core inflation did fall sharply in the first three months of 2019. The US economy remains strong despite a plethora of weak business surveys.
With the unemployment rate tumbling to new secular lows (3.6%), it must be assumed that it is only a matter of time before wages start to rise more quickly. The jobless rate for ‘less than 5 weeks’ dropped to 1.17% in April.
However, this not a given. Information and retail may be offering a glimpse into the realities of today’s economy. Companies will pay higher wages, but if the workers are not available, then they may seek alternatives to help expand output. One clear option is to focus on efficiency.
Indeed, it is remarkable to see how this business strategy has helped to reduce inflation risks: unit labour costs fell by an annualised 0.9% q/q in Q1 and were up just 0.1% y/y.
On the BEA measure, unit profit margins are still below their current high (Q3 2014). However, after rising 10.0% y/y in Q4, a similar increase in 2019 would put margins in line with their 2014 peak. Tax cuts generated a significant tailwind for equities for most of 2018. What really matters, however, is the underlying trend for margins, and that could be very positive (again) this year.
