U.S. Labor Slowdown vs. Robotics Growth
October 28, 2022
U.S. Labor Deceleration Will Cap Fed Hawkishness
Tightening financial conditions and a restrictive Federal Reserve monetary policy are likely to lead to a significant slowing in job gains over the coming nine to twelve months due to a curtailing in aggregate demand. This may bode well for quality growth names in Technology and Healthcare sectors.
Thus far in 2022, we have witnessed a decoupling between marginally negative U.S. GDP growth and buoyant labor market growth as employers added 3.7 million jobs to fill vacancies to meet existing demand. Lean employment levels will likely reduce the incentive to reduce the labor force, but jobs growth should slow down materially, and employers should be swift to cut back on new hiring and job postings in the coming months. This will ease wage inflation pressures and contain consumers’ and the market’s inflation expectations.
The Conference Board Index focuses more on labor market conditions, and we note that the most recent Conference Board consumer confidence survey showed a decline in its headline measure along with a weakening in its gauge of labor market conditions. The headline index fell from 107.8 in September to 102.5 in October. The survey’s labor market differential (jobs plentiful less hard-to-get) declined from 38.1 in September to 32.5 in October. This means that we are seeing marginal loosening in the labor market, but not outright distress as indicated by other labor data such as weekly jobless claims.
Realistically, it would take several months of hard data to convince the Fed that labor demand has moderated enough to ease underlying inflationary pressures. Yet, peak Fed hawkishness is likely in sight, and it will likely be reflected in the next Summary of Economic Projections (SEP) at the Dec 14th FOMC meeting. Peak terminal Fed Funds rate expectations are likely to bode well for risk sentiment, especially at a time of cautious investor positioning and elevated credit & equity volatility measures. Lastly, fading stagflation concerns, lower real yields, and a softening U.S. dollar will benefit quality growth equity sectors such as Technology and Healthcare.
Forget NASDAQ, Look at Robotics Instead
Miles Savitz
The robotics industry is one of the most exciting innovative spaces in the world today. The COVID-19 pandemic showed how interdependent our world is and how much labor we rely upon worldwide. Robots of all types let businesses run even if they do not have the labor force necessary. Now that population growth is slowing in countries like the U.S., Japan, and China; increasing existing labor productivity is therefore of utmost importance.
2021 was a year of records for robot installation. More than 500,000 industrial robots were installed – 22% higher than the pre-pandemic numbers of 2018. Thus far surpassed projections made in 2020. Industrial robot installation was not expected to pass this milestone until 2024. This number demonstrates that not only has the robotics industry recovered from the pandemic, but the effects of the pandemic have accelerated its implementation.
China made up more than half of all installations as their zero-Covid policy has made it harder for workers to get to factories. Service robot installations increased even faster than industrial robots, with a year-over-year increase of 37% for 2021. This part of the industry remains smaller at less than 200,000 service robots installed in 2021, presenting greater growth opportunities in the future.
With the increase in cost of labor and robot efficiency, the time it takes for a robot to pay for itself is shrinking drastically. Over the long term, robots will have a disinflationary impact that will keep wage inflation lower and help keep long-term interest rates in check, making the industry necessary to fight inflation.
This growth potential results in poor valuation metrics relative to broader markets – Robotics ETFs typically trade at a premium. However, valuations and technicals look attractive currently as Robotics names have been sold nearly twice as much as the S&P 500 during 2022. There has been some recovery in the last month, but it is in line with the S&P 500. With constant innovation and relative costs decreasing due to labor shortages, the robotics industry is set to continue its trend of above-normal growth.
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