Just 11 days ago put up a post on this sub that sounded too heinous to be believed: Federal Reserve tells business owners to unite against the workers and impose a hiring freeze in order to lower wages because workers being paid a living wage is causing inflation. Threatens higher interest rates to lower stock prices to force business owners to comply (and be off the hook).
Well, 3 news articles in the business press today, May 23, 2022, should remove all doubt that there's a large-scale effort underway to smash down workers' wages, and our business overlords get to use the Federal Reserve as the scapegoat for something they've wanted to do anyway. And there have been several other articles this month saying the same things. I'm posting some of these articles here.
Check this out from May 8, with the author telling us straight-up that the Federal Reserve thinks current wages for workers are so high it's a terrible thing and must be stopped:
- Good news is bad news in the economy right now – Economic strength is forcing the Fed to get more aggressive https://www.tker.co/p/federal-reserve-monetary-policy-inflation-down (May 8, 2022)
FTA:
On Tuesday, we learned U.S. employers had a record 11.5 million job openings as of March. That’s arguably the clearest sign that the economy is booming, as hiring workers isn’t cheap and most employers would only do it if they didn’t already have the staff to keep up with demand.
Currently, there are just 5.9 million people who are unemployed. In other words, there are nearly two job openings per unemployed person. The mismatch means that workers have a lot of options, which means they have a lot of leverage to ask for more pay. Indeed, employers are paying up at a historic rate.
But booming demand, record job openings, and higher wages… are bad?
The Federal Reserve and many in the economics profession are not putting it so bluntly. But that’s effectively their message.
The state of play: Demand for goods and services has been significantly outpacing supply, which has been sending inflation to decades-high rates. This is partly due to the fact that higher wages mean higher costs for businesses, many of which have been raising prices to preserve profitability. Ironically, these higher wages have helped bolster the already-strong finances of consumers, who are willingly paying up and thereby essentially enabling businesses to keep raising prices.
It’s important to add that this booming demand has been bolstered by job creation (i.e., a phenomenon where someone goes from earning nothing to earning something). In fact, the U.S. has created a whopping 2.1 million jobs in 2022 so far.
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This combination of job growth and wage growth has only been exacerbating the inflation problem.
And so the best solution, at this point, seems to be to tighten monetary policy so that financial conditions become a little more challenging, which should cause demand to cool, which in turn should alleviate some of these persistent inflationary pressures.
In other words, the Fed is working to take the legs out of some of the good news coming from the economy because that good news is actually bad.
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To be clear, the Fed isn’t trying to force the economy into a recession. Rather, it’s trying to get the excess demand — as reflected by there being more job openings than unemployed — more in line with supply.
“There's a lot of excess demand,” Powell said.
Article #1 from today:
- A major shift in the economic narrative could be underway https://finance.yahoo.com/news/a-major-shift-in-the-economic-narrative-could-be-underway-150358890.html
FTA:
The overarching narrative of the markets and economy has been one of strong demand meeting lagging supply, a dynamic that has caused inflation to surge.
While most signs suggest these trends continue to persist, a handful of anecdotes from the past week suggest this narrative could be changing.
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According to a Census Bureau report published Tuesday, business inventories grew 2.0% in March from the prior month. The inventory/sales ratio improved marginally to 1.27, but remained lean relative to historic levels.
In earnings calls last week, however, retail behemoths Walmart and Target suggested this problem could be a thing of the past for them.
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This striking chart from Bloomberg’s Kriti Gupta illustrates just how aggressively some of the big retailers have been about getting their inventories up.
This phenomenon where companies go from being undersupplied to oversupplied is a called the “bullwhip effect.”
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According to manufacturing surveys from the New York Fed and Philly Fed, suppliers’ delivery times indexes fell in May to their lowest levels in months.
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At the same time, however, there has been a pickup in anecdotes of hiring freezes and layoffs in the tech industry. On Tuesday, The Hollywood Reporter first reported that Netflix would be letting 150 employees go.
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Because supply chain disruptions have persisted for longer than many anticipated, the resulting shortages have caused inflation to be much hotter than what many expected.
And so, the Federal Reserve has responded by tightening monetary policy. They believe that tighter financial conditions should cool the labor market, which should cool wage growth, which in turn should cool demand to a level that’s more in line with supply. This should ultimately cool inflation.
The presence of bloated inventories and shorter delivery times would suggest supply chains are no longer a problem. And hiring freezes and layoffs suggest wage growth should cool. Assuming these anecdotes turn into economic trends, inflation should come down soon after.
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As the story of the economy unfolds, we’ll be keeping a close eye on layoffs, initial claims, inventories, supplier delivery times, order backlogs, and of course all of the various ways inflation is reported.
Article #2 from today:
- Increased immigration could help fix the U.S. labor gap: Goldman Sachs https://finance.yahoo.com/news/immigration-could-fix-the-us-labor-gap-goldman-sachs-185635183.html
FTA:
Increasing immigration into the U.S. could potentially fix the country’s growing labor force participation gap, according to a new note from Goldman Sachs.
“The gap between the number of available jobs and the number of available workers has allowed wages to rise at a rate well above the pace of wage growth compatible with the Fed’s inflation goal,” Goldman Sachs analysts wrote. “While reduced labor force participation is primarily behind the lower number of available workers, reduced immigration has also played a role.”
According to the U.S. Census Bureau, immigration into the U.S. decreased substantially in 2020, largely due to border closures stemming from the coronavirus pandemic.
Between 2010 to 2018, foreign-born workers “accounted for nearly 60% of the growth in the U.S. labor force, but growth in the foreign-born population slowed to around 100k/yr between 2019 and 2021.”
As a result, the U.S. population is roughly 2 million smaller than it would normally be while the labor force is about 1.6 million smaller.
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The Goldman note laid out five courses of action that the U.S. could take to boost immigration without having to rely on Congress.
These include reducing the administration's backlog and allowing more non-employment visa holders to work, along with recapturing unused visa allocation and broadening the use of extraordinary authorities, like raising the refugee cap.
Additionally, the note recommended expanding the number of limits in applications.
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Those immigration policy changes could slightly ease the job-workers gap and help boost wage growth while helping with inflation and lagging labor force participation.
“The gap would need to close by around 2.5 million to return wage growth to the 4-4.5% range, a level that would be consistent with the FOMC’s inflation goals,” the analysts wrote.
And note that this normally-right-wing business press is starting to sound like a bunch of Democrat leftists praising the benefits of immigrants in U.S. society, something unheard of from the Republican side until now:
Immigrants have previously proven to be a boon to the economy.
A pair of May 2021 reports from the bipartisan New American Economy found that “between 1996 and 2011, immigrants contributed $182.4 billion more to the Medicare Trust Fund than what the Fund spent on their health care. And between 2008 and 2014, immigrants contributed $174.4 billion more in health insurance premiums than was spent on them.”
And the H-1B program, which is the most common work program for foreign-born individuals, has been found to expand the number of job opportunities for American workers as well as immigrants since the program reduces the chances of employers moving jobs overseas.
Article #3 from today:
- Inflation: There will be ‘further layoffs’ that will be ‘fast and furious,’ strategist says https://finance.yahoo.com/video/inflation-further-layoffs-fast-furious-202545552.html
FTA:
Quant Insight CEO Mahmood Noorani and Brandywine Global Portfolio Manager John McClain sit down with Yahoo Finance Live to talk about recent market volatilities, outlook on tech stocks, the Fed's interest rate hikes, and positioning against Fed risks.
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So John, I want to start with you because, obviously, a lot of focus still on the Fed and what's happening with inflation. And you've said that the Fed will be the unicorn slayer. Break that down for us.
JOHN MCCLAIN: Oh, sure. Yeah. So what we've seen is an inflation shock that has led to unprecedented rate volatility post the GFC, which has led to, you know, really challenging environment for risk assets across the board. And so what we've seen is rising rates have led to high flyers in my market, like Uber and Carvana. They're pivoting from growth to free cash flow or a coin base that's focused on limiting cash burn. And so these companies have to right size their employee mix and I think we're going to see further layoffs. They're going to be fast and furious and this is going to have broader spillover. Because tech companies spent, spent, spent over the last decade, and now, finally, the bar tab's coming due. And we're going to see– we've already seen a meaningful wealth destruction in this part of the marketplace. You know, a lot of these employees were deep in the money on equity options nine months ago, and now they're wondering about layoffs. And if you look at the convertible bond market as a proxy here, many former Wall Street darlings, companies like Affirm, Beyond Meat, SoFi to name a few, you know, they're trading like they have serious bankruptcy concerns.
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Looking at this week, what's interesting is that we saw real rates actually fall across the curve a little bit in the last four or five days, and that has brought a bit of stability to global equity markets. But if you take a step back, the big picture here is that the fact is that the Fed is still in play. And one thing that global investors really don't like is uncertainty. And the problem we've got right now is we don't know when the Fed is going to stop. They have not signaled the terminal rate. And as long as we have the Fed in play and that uncertainty hanging over the market, the sort of rallies we've seen in the last few days, in my opinion, are going to be relatively short lived.
We're not at a long term bottom. The bottom will arrive very close to the time the Fed signals that it's done. And the Fed's only really just getting started.
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I think we've been conditioned over the past decade, really, since the global financial crisis, that the Fed is the White Knight. And I really think– I 100% agree with the other guests here. The Fed's going to change the goalposts on inflation targeting as well. I mean 2% inflation targeting wasn't a thing 20 years ago.
So I think that, really, they're going to try to contain inflation. And they don't care about your 401k. They don't care about risk asset valuation here. Because we're still 75% up on the S&P from the trough during COVID here. So I do think that markets are not appreciating how aggressive the Fed is going to be over the coming few months here.
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And as your other guest mentioned, one of the things that made it very easy for the Fed in the last 20 years to be the white knight was the fact that they had a very low inflation world being driven by increasing globalization, falling labor costs, technology and so on. So they could apply stimulus and they didn't have to worry about inflation. The problem for the Fed today– and this is where the Fed put strike starts moving a lot lower– is they can't do that now because they have completely different inflation context.
And here's more:
- Tech layoffs and hiring freezes increase as cheap money shrinks https://finance.yahoo.com/news/tech-layoffs-hiring-freezes-increase-cheap-money-shrinks-175749210.html (May 18, 2022).
FTA:
The job market in the tech industry is starting to show some cracks.
On Tuesday, streaming giant Netflix (NFLX) confirmed it is laying off 150 workers amid slowing demand. That same day, e-commerce giant Wayfair (W) announced a 90-day hiring freeze, citing ‘macro uncertainty.’
The cost-cutting measures coincide with recent stock market declines and the start of a tighter monetary policy cycle.
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Many of the companies announcing layoffs or hiring freezes saw their highest valuations during the pandemic when interest rates were near zero and the stock market was at all-time highs.