Labor slowdown

With the economy near full
employment, payrolls should grow by a similar
amount. That is well below the average monthly
payroll gain of 185,000 of recent years. It is
possible that more baby boomers may opt to stay
in the work force while the economy remains
strong.

This could result in monthly payrolls data
being rather more lumpy than usual, surging in
some months and collapsing in others. The labour
market would then become less reliable virtual
real time indicator of how the economy is doing.

To conclude, there is much talk about
normalisation, and after nearly a decade of ‘new
normal’ it sounds most welcoming. But the hope
that normalisation might be around the corner
has been around for nearly as long as the ‘new
normal’.

Could 2018 finally see a breakout? Given
the new team at the Fed, and QE fows at the
three major central banks will no longer be
increasing relative to net issuance, bond markets
will see an abrupt shift in their supply and
demand dynamics.

And all this against the backdrop of growing
US fiscal stimulus. That
means the coming normalisation will take place in
uncharted territory, not the standard late-stage of
an economic cycle. Therefore, it is likely the
environment for fxed income will deteriorate
after many years of strength even if many in the
market may prefer otherwise.