- Higher inflation is a top concerns for investors, but one driver of rising prices should ease next year, according to Fundstrat.
- A surge in labor supply will reign in the "Great Resignation" trend that has led to millions of job openings and higher wages.
- These are 6 reasons why investors should not expect the "Great Resignation" to hurt stocks next year, according to Fundstrat.
Amid the economic recovery from the COVID-19 pandemic, job openings have soared to new records as millions of people re-evaluate and leave their jobs.
The "Great Resignation," and subsequent lack of labor supply has led to climbing wages, and in-turn higher prices as businesses rush to fill positions to help service increased demand from a healthy consumer.
US job openings surged to a record 10.9 million in July, and annual wage growth has trended closer to 10% over the past few months, compared to an average of about 5% since 2014.
Worried investors believe that with employees in such high demand, increased wages will lead to a structurally higher inflation rate that dings corporate profits and sparks the Federal Reserve to begin raising interest rates quicker than anticipated.
But according to Fundstrat's Tom Lee, the labor shortage is transitory and will ease into next year as workers flock back to the job market.
"I know there is a general impression that the workforce feels empowered, or doesn't want to return to the office. Thus, this is simply the new conditions and thus, labor will be tight. But this sort of defies logic," Lee said in a Friday note.
These are the six reasons why the Great Resignation is only temporary and won't lead to structurally higher inflation, according to the note.
1. "Labor utilization is 4.9 million less now than February 2020."
"Has the economy permanently changed during COVID-19 that somehow less people working means a tighter labor market? Nope," Lee said.
2. "Participation rate matching February 2020 means 3.7 million people looking for work."
While the pandemic did lead to early retirement for some Americans, Lee doesn't think the drastic drop in the labor participation rate will be permanent as COVID-19 recedes.
3. "4.2 million Americans turn age 18 every year."
"All things being equal, the US labor supply grows every year," Lee said, pointing to an ageing youth population.
4. "Total labor force set to grow at a faster pace in 2025-2040 vs today."
The strongest impact Gen Z will have on the labor supply begins in 2025 and will last for more than a decade, according to Lee.
"If the labor market is growing at a faster pace, how can anyone really think labor inflation is sticky and structural?" Lee asked.
5. "Legal immigration is adding 1.1 million to the labor force annually."
With much of the "Great Resignation" being fueled by those quitting low-income jobs, legal permanent residents could fill in the gap and mitigate a surge in wages.
"It may not be a popular idea, but increasing the number of legal permanent residents will increase the labor supply. This increase mitigates pressure on wages, as this directly increases the workforce," Lee explained.
6. "Nearly 5 million Americans hit directly by COVID."
Many are not working because they either have COVID or are caring for someone with COVID, especially amid the delta variant surge.
"Covid-19 itself is creating shortages in the labor market. If COVID-19 recedes, this is merely a transitory shortage of labor," Lee concluded.