Summer Vacation from the Technology Sector?

It may be an interesting summer for the information technology sector (up 22% YTD as of last Friday) as recent developments are particularly concerning for its short-term growth.

The tight labor market is becoming worrisome for employers across the board. The unemployment rate is sitting at a historic low of 3.6%, and the labor force participation rate, which has steadily been trending down since the turn of the millennium, is at 62.8% (a 4.5% decrease from January of 2000). This apparent limitation in the supply of labor is particularly concerning for sectors requiring highly educated individuals, especially the information technology sector.

Historically, tech companies have been able to supplement their labor needs by tapping into the labor supply of other nations. In addition to work visas, foreign nationals working on technologies using specific types of advanced microprocessors also require a special license from the U.S. Bureau of Industry and Security. According to a recent Wall Street Journal report, the typical timeframe to receive one of these “Deemed Export Licenses,” has increased from several weeks, to 6 months or more, significantly hampering the ability of domestic tech companies to fill the apparent shortfall in the domestic labor supply. In addition to creating difficulties in the initial hiring process, these licenses are also only good for 2 years. This means it may be harder for tech companies to retain existing employees who do not have permanent resident status.

Furthermore, the U.S. trade war with China may jeopardize the import of specific minerals or components made from these rare-earth minerals, which are used in a variety of tech applications. China holds a significant portion of the planet’s rare-earth mineral resources and is a leading refiner of those minerals. According to a U.S. Geological Survey report from February of this year, China accounted for 71% of the global production of rare-earth compounds in 2018 and from 2014-2017, 80% of U.S. imports of rare-earth compounds and metals came from China. Bloomberg has reported that Chinese President Xi Jinping could use the export of these minerals as a weapon if relations are not improved.

Labor shortages and supply chain disruptions may make it an interesting summer for the information technology sector, especially if trade-relations with China deteriorate further. This will be worth watching in the following months.

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