September 2, 2023 | Jobs Report, Job Openings, Inflation, Bank Fees, Investing Fluctuations and IRMAA

Smart Investing with Brent & Chase Wilsey

Jobs Report
The Jobs Report reaffirmed exactly what the Fed should be looking for and that is a softening labor market. Nonfarm payrolls increased by 187,000 in the month of August. This beat expectations of 170,000, but the previous two months were revised lower by a total of 110,000 payrolls. This would put the three-month average at around 150,000 added jobs per month. This is well below the average monthly gain of 271,000 over the prior 12 months and is in line with 2019 when job gains averaged 176,000 per month. The unemployment rate also increased 0.3% in the month to 3.8%, but this was largely due to the increase in the labor force participation rate which increased 0.2% to 62.8%. This was the highest labor force participation rate we have seen since February 2020. With more people coming back to the labor market, more competition could be a big positive for lower wage inflation. In the month average hourly earnings came in slightly below expectations at 4.3%, which is off the high of 5.9% last year but likely still too high for the Fed. Health care and social assistance led the way in the report adding 97,300 in the month, leisure and hospitality came in second adding 40,000 jobs, and construction was also strong adding 22,000 jobs. The strength in construction does not come as a surprise considering the strength in the industry. The most recent construction spending report showed a 0.7% gain in the month of June to $1.97 T. This marked the 7th straight month of gains and it does not look like the industry is slowing. Areas in the report that were weak included transportation and warehousing which was down 34,200 and information which was down 15,000. The transportation industry was likely hit with the bankruptcy of Yellow as there was a drop of nearly 37,000 positions in trucking. The information sector was hit with the Hollywood strike as the sub-category for motion picture and sound recording dropped close to 17,000 jobs.
Job Openings
The amount of job openings declined to 8.8 million in the month of July. This was down from the original reading of 9.5 million in the month of June and marked the lowest level of job openings in 28 months. June’s reading was also revised lower to 9.2 million. The July reading greatly missed the estimate for 9.5 million openings. Job openings have fallen drastically from the record of over 12 million last year as companies have hired many new employees and have also become more cautious on the economy largely due to increasing interest rates. The number of job openings for each unemployed worker was still strong at 1.5 which compares to pre-pandemic levels around 1.2. For context, before Covid at the beginning of 2020 job openings totaled about 7 million. As the labor market has softened, the number of people quitting their jobs has also declined. Job quitters had topped 4 million for much of the post-pandemic period, but that has softened this year and in July the level was just 3.5 million which was the lowest level in two and a half years. This should be good news on the inflation front as less competition for workers should result in less wage inflation.
Inflation
The Fed’s closely watch gauge for inflation, known as the PCE, showed little change and few surprises in the month of July. The headline number showed a gain of 3.3% compared to last year which did rise slightly from June’s reading of 3.0% and Core PCE which excludes food and energy was right in line with expectations at 4.2% compared to last year. This was a slight uptick compared to June’s reading of 4.1%. I do wonder how impactful summer spending was on prices as consumer spending was up 0.8% in the month of July. This was the biggest gain in six months. Spending was powered by the best ever Amazon Prime Day, the box office hits of Barbie and Oppenheimer, and the Taylor Swift concert. Without major events like these, there could be pressure on spending which would have an impact on pricing and inflation as well. I still believe hitting the 2% target will require some time, but inflation is still heading in the right direction and there should not be a need to hike rates at the Fed meeting in September.
Bank Fees
A couple different bank fees have been coming down with the average overdraft fee falling 11% from last year to $26.61 and non-sufficient funds fees hitting an all-time low average of $19.94. One fee that has been rising is ATM fees. The average ATM fee rose to a record $3.15, this marks the 22nd record in 25 years. Fees for using an out-of-network ATM also jumped to a record high of $4.73. If you are using ATMs a lot, you should consider finding a banking network that is convenient for you to avoid the high ATM fees. I was also shocked to see in a Bankrate survey that 27% of checking account holders are regularly hit with fees, which can add up to an average of $24 per month, or $288 per year. There are many different banking options where you can efficiently use a checking account and avoid these fees. Many banks also waive these fees if you use direct deposit or maintain a certain balance. It is just silly to waste money on unnecessary fees. Make sure you understand your banking relationship and any fees that may be associated with it.
Investing Fluctuations
From time to time I hear from potential clients that they are afraid to invest because of the crazy times we are in. Many times, this has to do with the political landscape. I tell them that US politics has always been messy and crazy. I have included some examples you may remember, the others you will have to check the history book. During the mid-1960s through the mid-1970s the country was divided over civil rights. Remember in 1965 when Watts went up in flames? Or in the 1970s when the national guard killed four students at Kent State? This led to protests at 350 campuses, involving an estimated two million people. Also, you can’t forget when thirty-five thousand antiwar protesters assaulted the Pentagon in October 1967. The early 70’s was a crazy period to say the least as the U.S. experienced more than 2,500 domestic bombings in 18 months from 1971-72. Going back further, will require the history book but in 1888 Republicans won the White House, held the Senate and held the House but just by four people. During a floor vote if more than four Republicans were missing, House Democrats would demand a roll call and refuse to answer when their names were called. The measure would fail because there was the lack of a quorum. This kept the House from acting for months. In 1838 Whig William Graves of Kentucky shot and killed Democratic Rep Jonathan Cilley of Maine in a duel over charges of corruption. In 1824 Andrew Jackson led the four-way presidential race with 41% of the popular vote and carried 11 states but with 99 electoral votes came up 33 short of a majority. The contest went to the house where each delegate had one vote and they seated John Quincy Adams even though he was the runner up with 84 electoral votes. For the next four years, Andrew Jackson condemned the corrupt process and said it deprived the people of their right to a free election. In the next presidential election in 1828, Andrew Jackson defeated John Quincy Adams. These are just some examples of the craziness our country has been through. Unfortunately, crazy times will continue but ultimately good businesses will continue to survive and thrive. That is why I tell people to ignore the noise and focus on the businesses in your portfolio.
Financial Planning: IRMAA
There is a tax for over 5 million Americans known as IRMAA, which stands for Income-Related Monthly Adjusted Amount. It applies to Medicare Part B and Part D premiums for single filers over $97,000 and joint filers above $194,000 of income and can increase annual costs by thousands. This is in addition to the .9% tax on earned income and 3.8% tax on investment income for single filers above $200k and joint filers above $250k of income. In some cases, IRMAA can be appealed if income has reduced due to marriage, divorce, death of spouse, or reduction of work or income, but this can be difficult and time consuming so it is necessary to stay diligent. The most common income sources that trigger IRMAA are capital gains or Required Minimum Distributions from retirement accounts, so it is important to plan out your retirement income ahead of time to reduce not only federal and state taxes, but IRMAA as well.