Wall Street was relieved to see strong hiring in March. It’s probably shortsighted.
The Labor Department’s latest jobs report showed employers added 431,000 jobs last month, the smallest gain since September and below expectations. But that still firm figure, coupled with an upward revision to the payroll in February and a further slight improvement in labor market participation, left economists optimistic that the US labor market remains robust so far. that the Federal Reserve begins to tighten its monetary policy.
However, there are reasons to bet that the optimism that prevails today will soon fade.
As healthy as the March nonfarm payrolls report may seem, it has recently become more of a lagging indicator, says Joe LaVorgna, chief economist for the Americas at Natixis. Beyond that, there are signs that labor demand is slowing. The March survey of small businesses by the National Federation of Independent Businesses showed a sharp drop in hiring plans, while the employment components of the manufacturing and service sector surveys of the Institute for Supply Management have weakened in recent months, with new manufacturing orders falling sharply in March. Outplacement firm Challenger, Gray & Christmas, meanwhile, reported a 40% increase in job cuts in March compared to February.
All of this undermines a silver lining of rapidly rising prices. As gas, food and housing costs rise, the logic has been that more people who have been out of the workforce since the pandemic began would be more likely to join. Since labor shortage is at the center of the shortage of everything, increasing labor supply would reduce wage inflation and unfreeze supply chain issues, which which would lower prices throughout the economy.
But it doesn’t play out that way. In March, wages jumped 5.6% from a year earlier, the fastest pace since November 2020. Labor is the biggest expense for most businesses, and businesses are feeling the pain of rising costs. Consider what
(ticker: RH) CEO Gary Friedman said during the company’s earnings call last week.
“Companies will either make a lot less money or they will raise their prices. And I don’t think anyone really understands how much the prices are going to go up; everywhere, in restaurants, in cars, in everything. And I think it’s going to go beyond the consumer,” Friedman said. He added that demand for his company’s products, which target a more affluent consumer, has recently fallen sharply.
Recent data in Friday’s jobs report and elsewhere underscore Friedman’s concerns. Wage increases, while enough to put pressure on businesses and keep pressure on the central bank, are still not enough to keep consumers in line with consumer price inflation which sits at 7.9%. A separate report during the week showed real or inflation-adjusted personal disposable income per capita fell for the seventh consecutive month as price increases outpaced employment and wage gains, Jason said. Furman, professor of economics at Harvard. “Real personal disposable income is well below trend and falling,” he says.
Indeed, the savings rate has fallen below pre-pandemic levels. For the moment, consumers continue to spend by dipping into their savings. But that can quickly change. Natixis’ LaVorgna says the roughly $3 trillion in consumers amassed since the start of the pandemic could disappear within months if rising food and energy prices persist. He says current inflation rates are demand-destroying, meaning consumers will buy fewer discretionary goods and services as the costs of basic necessities further eat into monthly household income. “The likelihood of us slowing down significantly is quite high,” he says. “And then you’ll see the demand for labor drop pretty quickly.”
Consumers themselves expect continued price increases, which in turn portend higher prices. The Federal Reserve Bank of Cleveland, in conjunction with Morning Consult, recently came up with a new way of trying to measure inflation expectations. Instead of asking consumers directly what they expect from inflation, the new survey asks respondents to report the change in income they think they will need over the next 12 months to ensure they are also well off. and able to consume the same basket of goods. And services. The latest reading, released earlier in the week, shows consumers believe they will need a 6.5% increase in income to keep up with inflation. This rate is climbing rapidly and is the highest since the launch of the survey. That compares with Fed expectations that its preferred measure of inflation will fall to 4.3% this year and 2.7% next year.
The war in Ukraine is a major reason for rising food and energy prices, and the heightened economic uncertainty resulting from the conflict is undoubtedly weighing on consumer and business confidence. But to rely entirely on this explanation is to bet that the ramifications of this conflict will be a blow.
“The downside risks to the outlook are not just for Ukraine,” said Apollo Global Management chief economist Torsten Sløk. “The fundamental risk of a recession comes from the negative impact of rising inflation on consumer decisions and business spending decisions,” he said.
This is where the problem lies. If business demand for labor declines as commodity prices continue to rise, next year’s recession is increasingly likely. LaVorgna pegs the probability at 50%, raising the possibility that the Fed will not follow through on the 2.5% interest rate hikes that markets are expecting this year, which is separate from the balance sheet tightening that will begin In the coming months.
If the US economy manages to avoid a recession, to what end does it do so? Stagflation, where growth slows and prices rise, hardly looks like a victory. It is too early to know what will happen, given the uncertainty in Ukraine and therefore on food and energy price trajectories and policy responses. But the feedback loop between prices and growth looks increasingly negative, meaning labor market optimism could be fleeting.
Write to Lisa Beilfuss at email@example.com