News & Insights

The Labor Market is Cooling

The tight post-pandemic labor market contributed to stubbornly high inflation over the past two and a half years, but employment is returning to balance, which relieves wage pressure in the services sector. A growing labor supply and slackening demand, along with the recent improvement in productivity, are ushering in a period of moderating growth in unit labor costs.

Average hourly earnings are up less than 4% year over year, down from a rate of more than 6% in 2022. Competition among job seekers is the result of the rise in the labor participation rate for prime-age workers (aged 25-54), now above pre-pandemic levels. The unemployment rate has ticked up to 4.2%, rising almost a full percentage point from April 2023. It’s the effect of new entrants into the labor force plus an increase in immigration. The demand for labor has fallen, with job openings tumbling to near pre-pandemic levels, along with a sizeable fall in average weekly hours worked. Other metrics confirm this slowing with the supply and demand for workers nearly converging. A fall in average hourly wages in tandem with increased productivity will reduce inflationary pressures, bringing them into alignment with Federal Reserve targets.

Labor Cost Falling

Source: Bloomberg

Labor Demand and Supply Balanced

Source: Bloomberg

Prices of Goods are Contained

The goods sector is seeing a mild pickup in demand, but it’s too tepid to translate into a reacceleration of inflation, and it’s far from derailing the Fed’s rate-cutting path. Excess manufacturing capacity provides a buffer for companies to increase production in the event demand is stronger than anticipated without triggering another cycle of goods inflation. There are some risks to this expected result but the New York Fed’s Global Supply Chain Pressure Index, while rising, is still within a benign range.

The U.S. Producer Price index for goods, an early leader of the inflationary boom, has collapsed, presaging reduced costpush pressure on manufactured goods. Commodity demand has been muted, especially with the persistent weakness in economic activity in China. Manufacturing PMIs, both domestic and global, are contracting. The Logistics Managers’ Index shows only a modest expansion in goods moved by domestic freight, though transportation prices are rising faster than capacity and rejection rates have increased, reflecting a rise in demand from very weak levels. The pickup in demand could put upward pressure on costs, but any increase is likely to be minimal, especially with consumer prices in the goods sector already deflating. Container import volumes are up 18% year-over-year, but there is plenty of freight capacity to deal with the increase, keeping shipping inflation contained. The surge in imports reflects a rise in volume as shippers front-load the holiday season, avoiding the pending port strikes, rather than representing a sign of truly robust goods demand.

Shippers are faced with several global trouble spots which bring unpredictability and risks to stable prices. Drought continues to constrain capacity in the Panama Canal, and container freight rates soared with the October 2023 onset of the Israel-Hamas war. The commencement of mayhem in the Red Sea by the Houthis, which effectively shut the Suez Canal, is causing considerable delays as ships are forced to reroute around the Horn of Africa. Prices of shipping containers from East Asia to U.S. ports have fallen from their recent peak but are still more than twice as high as normal. East Coast longshoremen are at an impasse with the renegotiation of their contract and have announced that they plan to strike at the end of September, affecting 36 ports. A strike would snarl much of the supply chain, disrupting manufacturers and retailers as their cargos sit offshore.

Weak Producer Price Index Growth for Goods

Source: BCA Research’s Counterpoint

Capacity Utilization at Moderate Levels

Source: Bloomberg

Ocean Container Freight Rate Cooling off from Spike 

Source: Bloomberg

Fed Rate Cuts Resuscitate Housing Market by Spring Selling Season

Following a period of soaring interest rates and home prices in tandem with an historic supply-demand imbalance, a slowdown in existing home sales has brought the ratio of available inventory back to historical levels. The number of new housing units completed is near its highest level since the Great Financial Crisis and the supply of new multifamily housing units is running at its highest level since the 1980s. The number of new homes for sale is also rising, up 44% compared to a year ago. There is more in the pipeline, with the number of units under construction just coming off alltime highs.

The ratio of existing homes’ inventory-to-sales has risen to 4.1 months, up from an historically low level of less than two months as sales have stalled. Moderating rates will bring more families into the market and unleash pent up selling by homeowners who have been locked into their very low mortgage rates for several years. An abundant supply of new and existing homes on the market combined with better affordability should create downward pressure on shelter inflation, reassuring the Fed as they continue their easing cycle.

New Privately-Owned Housing Units Completed: Total Units

Source: Bloomberg

Existing Home Supply Coming into Balance

Source: Bloomberg

About Frost Investment Advisors, LLC

Frost Investment Advisors, LLC, a wholly owned subsidiary of Frost Bank, one of the oldest and largest Texas-based banking organizations, offers a family of mutual funds to institutional and retail investors. The firm has offered institutional and retail shares since 2008.

Frost Investment Advisors' (FIA) family of funds provides clients with diversification by offering separate funds for equity and fixed income strategies. Registered with the SEC in January 2008, FIA manages more than $4.3 billion in mutual fund assets and provides investment advisory services to institutional and high-net-worth clients, Frost Bank, and Frost Investment Advisors’ affiliates. As of Aug. 31, 2024, the firm has $4.9 billion in assets under management, including the mutual fund assets referenced above.

To determine if a fund is an appropriate investment for you, carefully consider the fund’s investment objectives, risk, charges, and expenses. There can be no assurance that the fund will achieve its stated objectives. This and other information can be found in the Class A-Shares Prospectus, Investor Shares Prospectus or Class I-Shares Prospectus, or by calling 1-877-71-FROST. Please read the prospectus carefully before investing.

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Frost Investment Advisors, LLC provides services to its affiliates, Frost Wealth Advisors, Frost Brokerage Services, Inc. and Frost Investment Services, LLC. Services include market and economic commentary, recommendations for asset allocation targets and selection of securities; however, its affiliates retain the discretion to accept, modify or reject the recommendations.

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This commentary is as of Sept. 26, 2024, for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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