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US worker shortage worsening inflation, lowering growth: ING

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The continuous labor shortage is weighing down potential economic growth, a new report from ING (ING) found.

“Labour supply simply isn't returning quickly enough and for companies desperate to hire this is a huge problem,” the report noted. “The implication is that it constrains growth and pay is bid higher, with those cost increases likely passed onto consumers.”

The report examined last month’s job report and placed some of its numbers in a larger context. Payrolls rose by 210,000, well under the 550,000 consensus estimates. According to the report, “U.S. employment is still [$3.9 million] below pre-COVID levels.”

The key reason for the constrained economic picture, the report goes on to say, is that demand far outstrips supply in the labor market.

“In our view, the key problem for the economy, as indicated by today’s payrolls number, is that demand for workers continues to outstrip supply by a wide margin,” ING explained. “There are more than 10 million job vacancies in the U.S., with the National Federation of Independent Businesses (NFIB) yesterday reporting that a net +48% of small businesses have job openings they can’t fill. There is absolutely no problem with demand. The issue is the lack of workers to hire with the labour participation rate remaining woefully low at 61.8%.”

The report, compiled by ING Chief International Economist James Knightley, identified the emerging Omicron coronavirus variant and inflation as two top economic concerns for investors for the near future. 

"With inflation set to push close to 7% next week we have to be looking for a $30 billion monthly reduction is QE asset purchases from January and the realistic prospect of three rate hikes in 2022 – Omicron permitting," the report said.

Among the reports findings were the revelation that almost 40% of working-age people are not engaged in the labour market “in any meaningful way,” despite employers’ pressing need for workers.

A protestor demonstrates outside the New York City Department of Health offices after New York City Mayor Bill de Blasio announced that all private-sector employers must implement COVID-19 vaccine mandates for their workers, as the highly transmissible Omicron variant has spread to at least one-third of U.S. states, in New York, U.S., December 6, 2021. REUTERS/Mike Segar
A protestor demonstrates outside the New York City Department of Health offices after New York City Mayor Bill de Blasio announced that all private-sector employers must implement COVID-19 vaccine mandates for their workers, as the highly transmissible Omicron variant has spread to at least one-third of U.S. states, in New York, U.S., December 6, 2021. REUTERS/Mike Segar

“This, in turn, is holding back the productive capacity of the US economy so growth is not as good as it should be"the report noted. "It boosts inflation pressures as companies compete for staff and bid wages higher. Today’s environment of decent corporate pricing power then means that these higher costs can be passed onto customers, which shows up in CPI.”

The Consumer Price Index report is set to be released this Friday. Markets will be watching closely to discover the extent to which high inflation persists after October's rate of 6.2% was the highest inflationary surge in over 30 years.

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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