The Fed’s Obsession with Labor Maybe Missing the Mark

Dec 22, 2022 | Macro Insights, No Bull Economics

Banner

3Q22 comments from many public restaurant companies indicate that labor costs are clearly moderating and that labor shortages are largely a thing of the past (except for pizza delivery drivers).

Key Points from Powell’s Recent Comments:

  • The largest component of the PCE inflation index (55% of the total) is non-housing related core services which is primarily driven by labor costs. The Fed reports that it has yet to observe much softening in a very strong labor market which is marked by high job & wage growth and elevated job vacancies.
  • The labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last 3 months.
  • The Fed reports that companies outside of the tech sector are reluctant to lay-off staff, reflecting concerns that they will not be able to rehire later. We would add that companies maybe reluctant to cut staff because they are not financially strained and because it is much more cost effective to retain existing employees than to incur huge training costs after knee-jerk layoffs at the first sight of an economic downturn.
  • Powell suggested that there are channels through which the labor market can come back into balance with relatively modest increases in unemployment and it may have to do with lowering the huge overhang of vacancies. Perhaps, if employers limit job postings employees would be less likely to job hop in search of higher pay. However, this sounds like collusion to us and would require the unlikely cooperation of most employers to be effective.
  • In any case, a 3.5MM structural labor shortage is pushing-up wage rate inflation which is best measured by the average hourly earnings number (see below) according to Powell.
  • The Fed has been surprised that higher wages have not increased the labor participation rate which declined post-covid because of early retirements, lower immigration & excess deaths of ~500,000.
  • The government seems to be dialing-back its push for higher minimum wages (including a huge drive to get everyone to $15+/hr). Also, it seems incomprehensible to suggest a lack of immigration given the well-known surge across the Southern border. Further, there was no mention of ramping baby boomer retirements which cannot help with this labor shortage.
  • We note that 3Q22 comments from many public restaurant companies indicate that labor costs are clearly moderating and that labor shortages are largely a thing of the past (except for pizza delivery drivers).      
  • In any case, we suggest that food cost inflation represents a much larger economic & societal threat than elevated but moderating wage rates.
Signup
NoBullEconomics
Restaurant Research

Email Sign-up

15 Second Posts

What is Fixed-Income Issuance Dominated by?

Total U.S. fixed income (FI) issuance declined -34% y/y to $8.8 trillion during 2022 as interest rates ramped up.

Bank Deposits Growing Much Faster than Business Loan Demand

Banks have been parking excess deposits in various forms of government debt that are subject to interest rate risk & in risky crypto bets. This is causing systematic risk.

Nerdwallet Survey Shows an Indebted & Very Stressed Consumer

Consumers are combating the higher price of living & higher interest rates by driving less, buying store brands & taking on more debt.

The United States of America is Worth Saving

Americans need to be reminded about our heritage as the single most productive nation as measured by GDP/person with a unique capability to bless the entire world if we can simply get back to business.

Should Private Banks Go Extinct?

Since the 2008 Great Recession, 134 banks with assets of $1.25 Trillion have been closed by regulators. At the same time, the Fed’s ballooning balance sheet now amounts to nearly 50% of total domestic bank deposits.

What Happened to Silicon Valley Bank?

Don’t assume that SVB’s difficulties are symbolic of the entire banking industry.

What Does the End of the Petrodollar Mean?

The Saudi minister of finance announced that the Kingdom was ending the petrodollar. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal”. Yikes!

Senator Kennedy Schools Country on Economics 101

We have a choice of how to tame inflation, cut government spending, or throw people out of work.

Inflation is Marginalizing Purchasing Power from the Lower-Income Demo

As households with annual incomes >$70k drive 62% of total food-away-from-home sales, it is more important than ever to focus on this demo especially as spending from the lower-income demo slows.

A Look at Consumer Expenditures by Category

You can learn a lot about someone by how they spend their money…

Digital Marketing Opportunities
Restaurant Research

A Restaurant Research LLC Company