THE ECONOMY, THE MARKET, AND THE NEW TRANSITION

Perspective is at the heart of our understanding of market conditions, the business environment, and economics as a whole. Ideally, that perspective is shaped by data and the accurate historical patterns derived from said data. Understanding historical economic and market patterns can then shed light onto what we can expect from the future, and the better we can anticipate the future, the more successful we will become in the present. With that in mind, we look to the future from the perspective of the past, but the unique period in history we currently find ourselves in may make the endeavor for future guidance more challenging.

The chart below illustrates quarterly growth in our country’s inflation-adjusted Gross Domestic Product (GDP), i.e., the total value of the goods and services produced in America during a given time. The chart begins in 2000 and continues through the present day, a 23-year period that encompasses the brief recession of 2001, the 9/11 attacks, and the Great Recession (the deepest and longest economic downturn since the Great Depression).

The tectonic economic jarring of the pandemic, produced by shutdowns and the subsequent monetary stimulus by the Federal Reserve Board and the fiscal stimulus by Congress and two presidential administrations.

In all, $6 trillion was pumped into the economy within a span of a little more than a year and a half. To provide a little perspective, if $1 equals one second, it would take over 31,709 years (longer than recorded human history) to reach $1 trillion. Six times that was the amount of money pumped into the economy in just 18 months. Consequently, we find ourselves now in the unprecedented environment that makes predicting the future so much more difficult.

The tight labor market in the post-pandemic economy is a direct consequence of many workers opting not to return to the workforce, notably women and those workers who were either at or near retirement age. Consequently, the labor force participation rate has only rebounded to 62.8%, as of September 2023. This means that roughly one-in-three potential workers are not actually taking jobs. Further, essentially all the new job growth, relative to pre-pandemic levels, can be attributed to foreign-born individuals rather than native-born workers. All of this in part explains why there is a strong demand for labor alongside a supply of labor that is limited.

Overall, the labor market is not as “tight” as it was a year ago, but “less tight” is still a long way from “loose.” Moreover, the increasing number of union strikes across a wide array of industries indicates the muscle in the labor market remains strong because of supply and demand principles at work. When demand significantly outstrips supply in the labor market, it results in upward pressure on wages. From a sentiment perspective, most surveyed workers don’t “feel” like they are making more money, despite escalating wages, because in fact they are not. When adjusted for inflation, the buying power of workers has decreased in recent years. This is especially true for workers in lower-wage industries remain much more sensitive to a price shock at the grocery store than higher-income cohorts.

Another good predictor of future economic conditions is the stock market, which generally has an anticipatory lead time of roughly 9-12 months. This discounting mechanism is not perfect, but good enough as a guide. The markets over the last month or so have retreated because of concern that inflation is more resilient than previously thought. Bond market yields have risen incessantly, meaning that the market has raised rates, and not the Fed. So, both the stock and bond markets have worked in concert, with a singular view of inflation. What we can expect from here is a potential normalization of the two markets, with a recovery in stocks and a taming of the strong rates environment. An additional variable is money markets now paying 5% or more with essentially no risk compared to the volatility of the stock market.

So far, I have been addressing high-level economics from a macro perspective. However, the PEO industry works in the small and mid-sized business (SMB) arena. The slight movement up or down in interest rates or the stock market has little long-term bearing on SMBs, whereas supply and demand make all the difference in this environment. Most small businesses are being squeezed by the rising cost of doing business, especially as it pertains to labor costs. Bankruptcies are on the rise as many small businesses are ill-equipped to contend with these pressures. Consequently, the PEO business model is perfect for this emerging environment. The economic headwinds of inflation, tight labor markets, tighter money and credit conditions will prove challenging.

Another element in this new environment is rising regulatory requirements, especially those administered by the U.S. Department of Labor. The Employee Retention Tax Credit (ERTC) is a perfect example of the PEO stepping into a complex labyrinth of regulations to assist small- and medium-sized businesses through what would otherwise be a very convoluted process. Likewise, SECURE 2.0 presents daunting complexities given some of the intricacies associated with the legislation regulating retirement plans. Imbedded in the legislation is a rich source of tax credits that enable companies establishing a new retirement plan for the first time to essentially do so cost-free for the first three years.

Let me conclude with the stock market as a future indicator. First, from a macro perspective, the market looks nine months to a year into the future. The fact that it hasn’t fallen substantially from all-time highs indicates that there is a relatively positive expectation on the part of analysts and investors. This view is likely assuming a “soft landing” into a mild recession or period of slower growth following the tectonic shifts of the past few years. Second, the “follow the money” market bet is clearly still on technology and specifically the rise of AI technologies. The transformative potential of AI is likely to have a greater near-term impact on the higher-order tasks of white-collar jobs than the manual labor associated with blue-collar work. In socioeconomic terms, this could be a very healthy development as the shrinking middle class (and prime-age workforce) that our economy, politics, and society has historically depended on, may in fact, resurge in the wake of AI.

So altogether there are several reasons to remain optimistic about the future, but at the same time when looking to the recent past for guidance on the transformation of the economy, expect the unexpected.