A recruitment sign stands near the auto parts factory SMART Alabama, LLC and its subsidiary Hyundai Motor Co., in Luverne, Alabama, July 14, 2022.
Joshua Schneyer | Reuters
The latest consumer and producer price data offered key evidence that inflation is easing, but the most important inflation read by the Federal Reserve has yet to cool: wage growth. While the recent CPI and PPI were below expectations and received with relief by the market, the latest jobs report and wage growth data remained hot. How many problems are there for the Fed and the market?
The good part of recent jobs data is that it’s possible the economy can avoid a recession. Worst case scenario: the wage-price spiral that some economists have feared since inflation began to take control of the economy becomes entrenched. We know the Fed is closely monitoring the pace of wage growth. But some top officials have said maintaining wage growth at a level that allows Americans to weather inflation is the goal, and the Fed has yet to indicate that it believes a wage price spiral is in evidence.
According to economists, the labor data could be key between now and fall with the Fed caught between excessive tightening and turning dovish too soon.
“The labor market is what keeps the Fed afloat,” said Bledi Taska, chief economist at labor market research firm Lightcast. “Wage growth is continuing,” Taska said.
Even before the latest monthly jobs report, the Employment Costs Index, which is tracked by the central bank, showed a quarterly spike of 1.3%, with wages up 1.4%. .
According to Kim Rupert, managing director, global fixed-income analysis at Action Economics, that wage metric has “spooked everyone” at the Fed. “They’re aware of the wage price spiral and it’s really impacting them, threatening them and giving them an edge,” she said.
Wage growth and owner-equivalent rent inflation are two factors that Rupert says are “really scaring the Fed right now” even if other inflation data is on track.
That’s because wages and rents tend to be tougher than other inflation indicators, which tend to be volatile, such as food and energy. With wages and rent, individuals tend to have a billed contract for at least a year. “Those are future risks,” Rupert said. Wages and rent will “hold the Fed in its break, but not stagnate it,” she added.
According to other indicators, the job market is cooling down. Outside of the hot wage growth numbers, one reason total hires rose in July, according to economists, is that it’s becoming easier for companies to find people to work.
“The bottleneck is created because people are leaving jobs, we’ve hit the peak of that and it’s going to trend down,” Taska said.
This view is supported by the latest labor market data that shows employees are accepting positions faster. And while there’s been no indication from the Fed that it will consider pulling back on rate hikes until inflation drops significantly, the latest statement from the Fed on FOMC minutes in July support this view of a labor market that is not fully reflected by wage growth figures.
The Fed noted in its FOMC minutes that “nominal wage growth continued to be rapid and broadly based,” but it also stated that “however, many participants also noted that there are some tentative signs of a fading labor market outlook.”
Rising initial unemployment insurance claims, falling layoffs and employment rates, slower payroll growth than at the start of the year, and reports of job cuts in some sectors are factors that have been highlighted. Fed cited. And the central bank said, “while nominal wage growth remains robust across a range of measures, there have been some signs of leveling off or slowing down,” with several contacts across the country. says that “the labor supply-demand imbalance is likely to be receding, with companies more successful in recruiting and retaining workers and less under pressure to raise wages.”
While the labor participation rate remains low, many short-term labor market dynamics related to the pandemic are easing, and that’s another point the Fed mentioned in its margin, according to economists. my latest FOMC version. Meanwhile, demand in the Covid economy is also losing traction, according to Taska, pointing out that credit card debt and total household debt both increase as stimulus savings dry up.
“There is a lot of pressure from employees because with a 5 per cent pay increase, they still get a pay cut,” says Taska.
But the bigger problem is competition for workers, and that’s why he thinks the labor market is getting closer to equilibrium.
What used to be in the pre-pandemic world as a local labor market has now become a national market for telecommuting, and Taska says it’s taken employers a long time to get the job done. recognize that form of intense competition and adjust the wage structure. There is also always a delay in approving the board’s annual salary budget. “Now it’s getting better because they realize there’s no going back,” says Taska.
“If you just look at the data, you don’t see the wage-price spiral in terms of the macro background of people’s ability to find a job,” says Taska. “I’m expecting the labor market to loosen up a little bit, hopefully not too much. We can’t hold back wage growth too much.”
In their view, companies are worried about wage growth for a different reason: productivity has fallen as wages have risen for several quarters, partly to the detriment of employers. “Many people are arguing that something fundamental could have changed in the economy and there will be lower productivity forever,” says Taska. If this turns out to be true, then it is bad for inflation, as it will continue to put pressure on prices for producers, which will eventually pass on to consumers.
The way inflation runs through the pandemic economy starts with a demand shock, because of stimulus efforts, then a supply shock (which the Russian-Ukrainian war exacerbated) and what people trying to figure out now is the next phase in the “Paradise of Shocks,” according to Glassdoor chief economist Aaron Terrazas. “Will it translate into a wage shock?” he asks.
Like the Fed, Terrazas remains skeptical of the idea. That’s because much of the inflation is driven by energy, and other commodities, and shelters. While wages are “hard” compared to other price forces, Terrazas says, they are also “planable and predictable”, and can be gradually introduced as costs get higher into levels. other price.
He is also hesitant to read too much about wage growth during an economic downturn, as history shows that lower-wage jobs are often the first and that can artificially inflate data. wage growth in the short run. He pointed out that the slowdown in wage growth occurred in 2008, during the “rage” of 2013 and 2014, and March 2020.
It is the vulnerability in the market’s perception of a “turn” in the CPI that worries Terrazas more, because of another food and energy shock in the fall and winter, in his view. , which could be what creates the conditions for a wage-price spiral.
Rupert said the stock market’s recent rally based on better inflation prospects and a lower risk of a Fed-induced recession is a sign that markets are ahead of the central bank. a little. “We have the market acting like a three-year-old in the back seat, asking ‘are we there, are we there?’,” she said.
Rupert sees price pressure stabilizing clearly in the data and that’s good news, but the downside is still uncertain. Like Terrazas, she’s focusing on the Employment Costs Index in the fall — “dangerous times,” Terrazas calls it, according to upcoming data the Fed will track. It’s more important than any recent warming jobs report, he said, because there’s “a lot of inertia” put into a nonfarm payrolls report that’s often confused with the real-time pulse of labor market.
“By the time there is an executive decision to allocate to new employees, that will translate into two to six months of payroll,” Terrazas said. “So the hiring that we saw in June and July, was to some extent a function of the decisions made in March and April.”
Over the next three to four quarters, Terrazas sees a higher risk of a reversal in food and energy costs, rather than wage growth itself, as cause to start worrying about the wage price spiral. “Three years of transient shocks, and more inflation in food and energy; then more salary reviews, and usually gradual wage increases are not enough,” he said. We really have to worry.”