Setting Expectations

Expectations are a powerful tool. Just like any tool, if used appropriately, it tends to add great value, but if not then they can work just as much against you. So, it is really a good thing to set clients’/investors’ expectations appropriately.

The other night I was out to dinner and we had made reservations for 7:30. We get there on time, wiggle our way through the crowd to tell the hostess we had arrived and she says it would just be a second. Fifteen minutes pass and the lady tells us that reservations would be seated within 30 minutes of their reservation, due to the current crowd. Right then and there, expectations have been set.

Eight o’clock rolls around and nothing. Giving them the benefit of the doubt, we wait to say anything until 8:05. When we ask the hostess, she mentions that we are still waiting on tables. Then, 8:25 rolls around and we go get an update from the hostess who ends up informing us that she lost our reservation in the mix and would move us to the top of the list. And at 8:35, we are finally seated.

Having set the expectation of us being seated by 8pm and not being seated till 8:35 made for a very unpleasant beginning to the meal. If expectations were set to say that it could be an hour wait despite the reservation, then this likely would have sat better with us because we could have gotten drinks or an appetizer at the bar while waiting. Setting expectations and not meeting them provides a tough hurdle to overcome.

Longer term expectations for the employment outlook have continuously been that we should be adding many more jobs at this stage of the recovery than we currently are. Analysts have been expecting 200,000+ jobs per month being added given how far into the recovery we are.

These expectations led to investors feeling unsatisfied every first Friday of the month over the past couple of years. Because we had set these expectations for how jobs were supposed to be added, we were unable to understand why we weren’t adding them so quickly.

Many people were unable to accept the fact that this was a structural unemployment environment, which means that the jobs that were lost in the recession just aren’t around anymore. People have to be retrained and new industries might need to be formed to help create openings for these people to fill. Unlike recoveries in the past, the job openings of today need far different educations than those that are unemployed received in their prior jobs.

Now, five years into the recovery, we are still stuck wondering how long it will take for this structural unemployment situation to reverse. The most recent employment report had a real low bar of expectations and when we beat to the upside, people cheered, despite the numbers being well below the prior month’s expectations for seeing 200,000+ jobs being added. This was just another sign of the power of expectations.

What seems more concerning than the number of new jobs being added is the trend of the labor force participation rate. In 2000, we had a labor force participation rate of 67% and today we have a participation rate of 63%. The future productivity of the country comes into question when the number of people working or looking for work drops as a percentage, while the possible working population grows. The population that could work has grown by 16% since 2000, while the labor force has grown by just 9%.

So, maybe setting expectations isn’t the only aspect that is important. Maybe what’s even more important is setting the right expectations. Because with employment, seeing 200,000+ jobs added per month may be great for today, but a declining labor force isn’t great for tomorrow.

(All data used within The Capital Course was provided by Ned Davis Research)



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