In the end, it’s hard to imagine how well this all ends for anyone. Workers continue to leave their jobs for better paying jobs at high rates, which led to a 5% increase in average hourly wages in the private sector in September compared to a year ago, still well above rate that would be consistent with the Federal Reserve’s 2% inflation. target. On a three-month basis, the situation is only marginally better at an annualized rate of around 4.4%.
The labor market is simply not experiencing the kind of cooling that would allow the Fed to slow the pace of interest rate hikes, significantly increasing the risk of a recession. Indeed, even if wage pressures ease in the data, there is an argument that another bump could occur in the coming months as companies head into performance review season and workers notice that inflation has eroded their purchasing power. Many workers have taken advantage of the strength in the job market to find new positions over the past year, but those who have stayed expect bigger-than-usual increases. If this happens, one or other of the companies will raise prices further (damaging brand loyalty and incurring the ire of the Fed); profit margins will shrink; or workers will be forced to suffer and, as a result, the consumer economy will collapse.
Economic orthodoxy has long suggested that labor markets need to loosen to keep inflation in check. While there are many reasons not to take this as an article of faith, the evidence for average hourly earnings takes the debate out of the realm of theory. The best case scenario for the current economy is probably one in which workers decide to accept the loss of real wages – this is simply the cruel reality of the conduct of monetary policy, at least until the central bankers find a better solution. This is perhaps the most likely path to a “soft landing”, as Fed Chairman Jerome Powell has put it, in which the Fed is able to restore price stability without causing serious recession.
But it’s far from clear that the US economy is really headed in that direction. Many employers are apparently still catching up after pandemic-related hiring challenges, and they added 263,000 seasonally-adjusted workers in September, well above the average of 190,000 per month. in the five years preceding the pandemic. The unemployment rate fell to 3.5%, matching a five-decade low.
Optimists have long argued that an improvement in labor supply could help bring wage increases to a more sustainable pace without necessarily pushing up unemployment, but the employment-to-population ratio in the lower bracket. working age – the ratio of workers to people in the 25-54 age group – actually slipped a hair to 80.2% in the most recent month. Labor supply seems non-existent at this point, unless you think older workers will suddenly reconsider retirement or a change in immigration policy is in sight.
Unfortunately, the stock market is not prepared for a major reduction in profit margins, let alone a major recession. Margins have narrowed a bit in 2022, but are still relatively strong by historical standards. Until recently, companies could pass on rising costs, but this will not be the case indefinitely. Still, analysts and the market don’t seem to be anticipating much more margin deterioration. In fact, projections compiled by Bloomberg suggest they expect margins to rebound in 2023 and 2024.
Ultimately, none of this bodes well for the economy as a whole, which is why the S&P 500 index was down about 2% on Friday. As Anna Wong, Bloomberg Intelligence’s chief U.S. economist, wrote, the labor market data “significantly strengthens” the case for another 75 basis point hike in the federal funds rate this month. next, potentially raising the upper limit of the target range to 4%. The Fed’s decision will ultimately depend on the publication of the consumer price index expected on Thursday. But with such a resilient labor market, even a dramatic improvement in the CPI would still leave the Fed worried about what lies ahead several months from now. For businesses and workers, it is increasingly difficult to see how this can all end happily.
More from Bloomberg Opinion:
• The moral case for higher interest rates: Ramesh Ponnuru
• Fed splits difference on labor market pain: Jonathan Levin
• The Fed must show that it is ready to cause a recession: editorial
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.
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