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The labor market isn’t cooperating with Fed Chairman Jay Powell’s mission to bring down inflation. Employment in November held at 3.7%, remaining close to its 50-year low. But the consequences of such a tight labor market are higher wages. Hourly pay rose by a sharp 0.6% over October, to an average of $32.82. Year-over-year, wages have increased 5.1%, about double the increases reported before the pandemic, and higher wages mean people have more money to spend. So why isn’t that a good thing? As Straight Arrow News contributor Larry Lindsey explains, if a company increases its wages, it then has to raise the prices it charges for its products and services.
The employment report, which came out on Friday of last week, really showed this problem very starkly. For example, if you look, overall, the wage rate, wage inflation rate, it was going up, went up just 2.8% in goods-producing industries. But in the roughly 75% of the economy that is services, wages went up at an annual rate of 8%. And if you look at what are called production and nonsupervisory workers, meaning not the supervisor online, but the person who works on the assembly line or, you know, does basic work, it was even greater. Goods inflation for wages was up 4.3%. For services, it was 9.4%. Well think about that.
The cost of hiring people that you can name is anything from a doctor’s office to McDonald’s is going up at 9.4%. Then, prices that those businesses have to charge have to go up pretty close to the same amount, but chances of getting disinflation, lower inflation, just aren’t there.
And deeper in the numbers got even worse. For example, the number of teenagers working rose 149,000. The number of people 45 and older working declined 271,000. Well, that’s a lot of trouble, because the older workers are also more experienced workers. Not only that, older workers tend to get paid more than teenagers. And so if you see more teenagers and fewer older workers, if anything than average wages should have been going down, not up. Instead, they went way up. So you have a problem. Another problem for the companies, and that is experiences declining. And they have to have other costs, particularly training costs to handle all the new, younger workers.
This puts enormous pressure on the cost side of production. It also puts problems on the demand side. In the last six months, wages have been going up at an annual rate of 7%. You know, good for us, bad for inflation. Because if wages are going up at 7%, we can buy 7% more.
And if the companies are only able to produce say 2% more, it means it’s going to difference is going to be made up in 5% inflation, way above what the Fed’s target is. So the Fed has a lot more work to do.
It’s probably going to be raising interest rates 50 basis points – half a percentage point at its December meeting – and probably will have two 25 basis point, quarter percentage point hikes next year, bringing the Fed funds rate to 5%. This is bad news for stocks. First of all, companies are going to see a profit squeeze. After all, it means wages are still going to be going up more than prices they charge. And secondly, when interest rates are higher, stocks become less attractive, and people are more attracted to say buy bonds or put their money in a savings account.
The labor market remains key to America fighting its inflation problem. Unfortunately, that fight is far from over. And 2023 is going to be a very difficult year.
