Employers added 531,000 jobs in October, bringing the unemployment to 4.6%. On its face, this seemed like a strong report, but the market was largely unimpressed, looking for greater acceleration in job growth. The participation rate remained unchanged at 61.6%, with evidence pointing to Baby Boomer retirements as one of the main culprits. The labor market remains incredibly tight as evidenced by the record jobs openings relative to job seekers. Firms are responding by increasing wages and benefits along with lowering requirements for new hires.


Supply chain issues continue to show few signs of abating and problems remain at every part of the “chain.” Overseas factories are struggling to meet demands for the raw materials and components needed for finished industrial products. Firms are reportedly ordering excess supplies to boost inventories which is further exacerbating supply/demand imbalances. Shipping remains constrained due to a lack of containers and capacity. On a positive note, shipping rates have come down since the beginning of the year indicating a loosening of conditions. Once at US ports, ships are not being unloaded in a timely manner. The US government is working to alleviate port congestion by mandating around-the-clock operations. Industry experts are advising this will help but won’t solve the issue because of tight labor conditions at ports and trucking firms. Industry experts predict that challenges could remain through next year and higher prices will be the mediating factor until these issues get resolved.


Despite all the economic imbalances, corporate America is churning out record profits. 85% of the companies in the Standards & Poor’s 500 Index have met or exceeded their third-quarter earnings targets. Profit margins are at an all-time high as companies push through price increases to deal with higher labor and input costs. Record-low borrowing rates have also protected margins and have spurred on increased capital investment. While we can explain the strength in equity market returns, we remained perplexed by low yields in the fixed income space. Rates got a slight lift after the taper announcement by the Federal Reserve in October but have since traded off. The main market driver seems to be the timing of the first interest rate hike by the Fed. While that is certainly a consideration, we are more focused on earning a real return, i.e. a return above inflation. We are maintaining below benchmark duration in fixed income holdings until this risk is adequately compensated.


Bottom Line:  The US economy grew at 2% in the second quarter despite significant headwinds from a tight labor market and supply chain issues. Annual US GDP growth forecasts peaked at 6.5% over the summer and is currently estimated to come in around 5.5%, a level not seen since the mid-1980s. This growth has come at the cost of higher inflation brought on by dislocations from the pandemic shutdowns. We expect conditions for economic expansion to be favorable through 2022 with the most significant risk being greater than anticipated persistence in inflation coupled with a policy mistake by the Federal Reserve.