How jobs market could survive consumer spending slowdown
The consumer is critical for the near-term economic outlook. The prospect of a squeeze on incomes is a significant risk and one which has the potential to severely derail the already modest growth we are enjoying.
In thinking about how a consumer slowdown might impact the labour market, it is useful to look at the sectoral make-up of jobs created since the labour market began to recover at the beginning of 2012.
What is striking is that sectors directly reliant on consumers, such as retailing and entertainment, do not lead the way in job creation.
Instead, sectors such as admin and support services, manufacturing and professional services sit near the top of the charts.
Restaurants and hotels, another growth sector, is driven by a combination of consumer demand and tourism. This surprised me somewhat as I had expected to see a more prominent direct consumer pattern in the data but this appears not to be the case.
This suggests there might be a degree of labour market resilience to a consumer slowdown, though the prevalence of part-time work in the job data should not be ignored. Quarter four data is due in March and it will be worth revisiting this pattern again to look for consumer vulnerabilities.
Further labour market strength is evident in the unemployment figures, which reported a fall to just 2.7% of the working age population in January, very close to full employment.
We should expect to see skills shortages becoming more and more of an issue against this backdrop, especially with the possibility of importing workers to meet shortages reducing in light of the Brexit choice.
There are now negligible numbers of people on the unemployment register seeking professional work and even in skilled trades and elementary occupations, the numbers have all fallen to very low levels. It is true that many people who enter the labour market will not come from the unemployment register but categories of what is referred to as the economically inactive including students, those looking after the home or suffering long term sickness.
Nevertheless, a tight labour market would appear to be the prevailing condition.
The tightness of the labour market is critical because the ability of wages to keep pace with rising inflation will be crucial in determining the scale of consumer squeeze experienced.
The Bank of England's recent inflation report projects relatively strong wage growth, keeping just ahead of inflation which rises, though never gets above 2.7%, in the medium term.
This seems a little too convenient and at odds with the Bank's own agent expectations which suggest wage inflation will be closer to 2%.
This is the 'new normal' for wage growth, according to ex-MPC member David Blanchflower and others. Our own UUPEC/Cambridge University forecasts suggest a tougher time for consumers with inflation heading above 3% and wages struggling to keep pace, suggesting a fall in real incomes. Considering the current pressure on public service budgets it seems highly unlikely that the large public sector will be able to manage inflation-matching pay rises if the rate does indeed head north of 3%.
In addition, it remains to be seen whether employers in globally competitive export markets will be willing to pass on any benefits of a lower currency in pay settlements (which, unlike currency movements, are hard to reverse if circumstances change).
We should remember that skills shortages as a result of low unemployment fall into the category of 'nice problem to have'. A tight labour market is positive and some upward pressure on wages healthy and desirable.
I still rate a consumer squeeze as the number one risk and remain unsure what the reality of tariffs and migration controls might bring. But I am heartened by what continues to be a more balanced sectoral picture.
In next week's Economy Watch, we hear from Dr Esmond Birnie of Ulster University