Location Strategy Chartbook 11.03.24

The Employment Cost (ECI) Index shows wage growth subsiding, which means a less tight labor market.

The ECI measures quarterly changes in compensation costs, which include wages, salaries, and employer costs for employee benefits for nonfarm private and state and local government workers.

Wages grew at 3.4% annualized in Q2 and 3.1% in Q3, pretty similar to late 2010's levels

The October nonfarm payrolls report showed a gain of just 12,000 jobs for the month. Economists surveyed by Dow Jones were expecting growth of 100,000 jobs.

The Bureau of Labor Statistics cautioned that the report was influenced by hurricanes and the strike at Boeing. Those complications may have dampened the reaction to the miss among traders.

The unemployment rate held steady at 4.1%.

10-year Treasury yield rises above 4.3% as traders ignore noisy jobs report

Most nations face shrinking and aging populations in coming decades. Many argue that a shrinking labor supply will drive up wage pressures — as indeed is now happening in Japan — and therefore inflation.

US potential growth rate of roughly 2% is viewed by economists per Bloomberg as a sort of speed limit: keep expanding faster than that, and it will cause inflation to accelerate, eventually triggering a bust that takes growth back down or even shrinks GDP.

Federal reserve policymakers see that rate at around 1.8%. The IMF is slightly more optimistic, projecting growth five years from now, which is effectively the same thing as potential, at 2.1%.

That makes the 2.8% annualized growth rate for last quarter look smoking hot, especially after a 3% pace for the second quarter. The Atlanta Fed’s initial “GDPNow” tracking estimate for the final three months of 2024 came out Thursday: another strong reading, at 2.7%.

Bank of America internal data for the third quarter of 2024 suggests a continuation of the trend that began at the start of the pandemic in which people are moving away from areas with less affordable housing

Boston and New York are experiencing a slightly faster decline in population growth compared to last quarter while in the West, Midwest and South, the data remain more mixed.

San Francisco, San Jose, and Los Angeles all saw YoY declines, while Las Vegas and Phoenix experienced gains – the latter of which are all likely to offer relatively more affordable housing in the region. Denver experienced a population increase in Q3 2024, but is growing much slower compared to the previous quarter.

Miami and Orlando experienced some of the largest declines, while Austin, San Antonio, Jacksonville, and Nashville grew.

In the Midwest, Indianapolis, Columbus, and Cleveland top the list of net population inflows while Chicago and Detroit saw small declines.

Life insurers' holdings of private credit have likely reached $175 billion. Because disclosures about such holdings are lacking, we developed a proprietary approach to measure it. We traced companies' exposure through their portfolios of loans, collateralized loan obligations (CLO) and asset-backed securities (ABS). The sector's exposure to private credit is now close to 4% of its total investments, according to our calculations.

Insurers' private credit portfolios are lower quality than their other investments. The average credit rating of private credit investments is two notches below that of the aggregate fixed income portfolio (Figure 1). Additionally, the ratings on private investments are not transparent, which limits their value in assessing risk properly. There are signs that some of these investments have become riskier.

The credit risk has not been tested. Increasing withdrawals from annuities in recent years have tested the liquidity of life insurers, which they have successfully managed. But the growth of private credit investments has coincided with a period of economic stability, and the higher credit risk of such investments has not yet been put to the test during an economic downturn.

While the spending growth of Baby Boomers and Traditionalists was significantly stronger than younger generations in 2022 and 2023, this year's gap appears to have narrowed, according to Bank of America credit and debit card data.

One reason could be that the cost-of-living Adjustment (COLA), which affects social security income, was previously stronger than wage growth, however, this is no longer the case. The COLA increase effective in January 2025 will likely not change this situation. While some retirees receive income from other sources such as pensions, Bank of America internal data does not indicate that these households have significantly stronger spending growth than those relying solely on social security.

Rising net financial wealth could support the spending growth of some older generations, but we think this is likely to be fairly concentrated. And thus far, we don't see strong evidence for the spending growth of higher income retirees being faster than that of lower income retirees.