Jobs and Chips

by
Leo Wealth

Christos Charalambous, CFA
Charles McKenzie, CFP®

U.S. Labor Market Rebalancing Will Reign in Inflation

Leading indicators for both wages and employment suggest an easing in wage inflation and a rise in the U.S. unemployment rate by year-end. The JOLTS job openings report for June fell to a nine-month low of 10.7 million from a record 11.9 million in March. In addition, initial weekly jobless claims have increased from a cycle low of 166k in March to 256k for the third week of July. Regional surveys have also pointed to a softening in labor market demand.

Wage growth needs to decrease from its current 5.1% YoY pace to 3.5% to be consistent with the Federal Reserve’s target of 2% inflation. In our view, downward pressure from the Fed-driven tightening of financial conditions will slow wage growth to 4.5% by the end of 2022 and under 4% by the end of 2023. As we can see in the chart below, the ratio of job openings to unemployed people still points to a tight labor force, but a rebalancing is underway. In June, the jobs-workers gap declined to 2.9% of the labor force (4.8MM workers) from its peak of 3.6% of the labor force (5.9MM workers) in March. We also note that two years since the start of the pandemic, the labor force participation rate remains at 1.2% below its pre-pandemic level of 63.4%, mainly due to exits of people aged 55 and older. Participation rates of young and prime-age people have recovered to pre-pandemic levels. Against this backdrop, slow job creation should ease wage pressures in the second half of 2022.

The Federal Reserve has begun to regain the markets’ faith in terms of its resolve to keep inflation expectations in check. The challenge remains for the Fed to engineer a timely economic soft landing while managing the market’s expectations before eventually shifting to a dovish policy pivot. In the context of two consecutive negative GDP quarters (Q1-Q2 2022), we believe slowing wage growth will lead to further easing in inflation expectations and thus a risk-asset-friendly Fed tightening pause by year-end.

 What Impact Will The CHIPS For America Act Have?

After nearly three years, President Biden is set to sign into law the bipartisan CHIPS-Plus bill. The bill’s passing will lead to roughly $80 billion in new spending in the semiconductor space. The bill seeks to decrease the United States’ dependence on outsourcing chip manufacturing to Asia through means of financial incentives. More specifically, the $80 billion bill sets aside $39 billion for U.S. and non-U.S. chip companies to build, expand, or modernize domestic chip manufacturing facilities, with an additional $11 billion to be used for research and development in the space.

U.S. lawmakers are hopeful this bill will play a key role in reversing a 30-year downward trend in the United States’ share of global semiconductor production. According to the Congressional Research Service, in 1990 the United States produced and manufactured roughly 40% of the world’s semiconductors. In 2022 the United States is merely responsible for 10% of the world’s production, despite accounting for roughly 37% of the world’s consumption (see Figure A). This dislocation was evident during the Covid-19 pandemic, as chip shortages reached all-time highs due to weakened international supply chains and closed borders brought on by the pandemic. 

Figure A

While it seems the passing of the CHIPS-Plus bill will aid in creating an increased supply of semiconductors, there is also a concern that production is being increased in the face of slowing global growth and demand. This is especially true in the consumer electronic space, as it is believed that many consumers upgraded their computers and telephones during the pandemic and will not need to replace them again for years. Evidenced by a strong correlation between semiconductor sales and global growth, as well as an increasing chip inventory level (see Figure B and Figure C).

Figures B and C

The passing of the CHIPS-Plus bill was necessary for the US to regain a larger portion of the global manufacturing share of semiconductors, as well as a crucial step to obtain eventual self-sufficiency in the space. We expect demand to remain high in sectors outside the consumer electronic space, as supply shortages still exist in the auto and server industry. We believe the passing of CHIPS-Plus is a positive for the semiconductor space. However, we do not view it as a major event that will move markets considerably. 


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