Episode summary
Lack of Labor Supply is 'Slowing the Economy in Itself,' Says David Kelly
Bloomberg Surveillance
· · 6 min · Guests: David Kelly, Stephen Miran, Eric J. Felsberg, Jonathan Berry
Summary
The guest argued that the U.S. economy should stay okay into early 2026, helped by income tax refunds and a likely pickup in growth in the first half of next year. But that strength should fade because labor supply is too tight, and the guest said the lack of workers is already slowing the economy by limiting job creation, restaurant openings, and even housing construction. In that view, the labor shortage is not just a symptom of weak growth; it is part of the slowdown itself.
On markets, the guest said earnings have been strong enough to support equities, and that a broadening rally beyond the Mag 7 remains the base case. Still, valuations are high and the risk level is elevated, so the main message for investors is to rebalance rather than chase returns. The guest also said productivity gains from labor-saving technology are helping corporate profits, which supports the market absent a shock.
For rates and portfolio construction, the guest said rate cuts will not fix the economy’s underlying labor problems, though the Fed may ease more aggressively later next year if payroll growth stays weak. He argued that traditional 60/40 portfolios look expensive, that investors should consider alternatives such as infrastructure, real estate, private equity, and private credit, and that fixed income offers stability but little reward for taking too much credit risk.
Key takeaways
- The guest expects growth to improve in the first half of 2026 on income tax refunds, then fade because the economy is short of workers.
- The guest says nonfarm payroll growth is running near zero and may stay between -50 and +50, making labor supply a binding constraint.
- The guest sees equities broadening beyond the Mag 7, but says valuations are high and investors should rebalance because risk is elevated.
- The guest says rate cuts may come later next year, but they will not fix the economy’s labor-supply problem.
- The guest recommends alternatives such as infrastructure, real estate, private equity, and private credit because a 60/40 portfolio looks expensive.
- The guest would not take much credit risk in bonds because spreads are tight and would likely widen in a recession.
Notable quotes
“I think the economy itself should be okay. I think it's going to be strong in the first half because of income tax refunds”
“the lack of labor supply is slowing the economy in itself, right”
“Rate cuts won't fix anything here. The problem, the problems that this economy faces have got nothing to do with interest rates”
“I don't think there's much money to be made in fixed income, but I think that it does help stabilize the portfolio”
How the episode opens
Well, I think the economy itself should be okay. I think it's going to be strong in the first half because of income tax refunds. I think we will see a pickup in growth in the first half of the year and then it's going to fade because we really are short of workers for the markets.
We still probably need to see a shock to cause a big correction here. You know, eventually we will have some shock. Valuations are very high.
But, you know, I think a base case is the market keeps on, the equity market keeps on moving up, probably broadens out a bit beyond the the Mag seven. And, you know, it continues sort of broadening out to other sectors. But for investors, the real thing is, you know, how much risk are you carrying because these are expensive stocks at this point.
And I think the really the resolution for 2026 is rebalance, because, you know, whatever happens to returns, the risk level is pretty high. Here are the earnings that we see out there. I mean, the earnings in 2025 have been really, really strong.
Are they strong enough as you look forward to kind of support this market? Yeah, I think they should be. I mean, it's a it's a moderately growing economy so long as we avoid recession.
One of the things that I'm seeing is a fair amount of weakness in wages. I mean, there aren't many available workers would work. I still can't get a pay increase.
And meanwhile, companies are installing a I know I don't know if that's making people more productive or not, but they say it's making them more productive. And so people and so productivity numbers are going up because you've got fewer workers and producing more output, and that helps corporate profits, too.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- k-shaped expansion
- labor supply
- fed rate cuts
- workplace ai hiring bias
- disparate impact employment law
Companies and tickers mentioned
- JPM
- J.P. Morgan Asset Management
- Jackson Lewis PC
Watch the episode
Watch “Lack of Labor Supply is 'Slowing the Economy in Itself,' Says David Kelly” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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