Kisha Gulley was once kicked out of a Facebook group for mothers with autistic children after a c...Read More
Wage growth Tracker by ageFederal Reserve Bank of Atlanta
After years of trying to move inflation higher (the elusive 2% inflation goal), the Fed’s ultra-easy QE policies along with plenty of help from the fiscal side (“helicopter” money, and outsized fiscal deficits) have more than accomplished the goal. Overshoot is an understatement! The financial media tells us every day that inflation is at a 40-year high with a seeming majority believing a return of the 1970s, years of ingrained high inflation levels, is at hand.
Much of the current spate of inflation is a function of supply chain bottlenecks, service sector personnel issues, “helicopter” money, and corporate greed – all of which are transitory (to use the unpopular term).
Supply Chains: Supply chains are still somewhat strained. Toyota has announced an output reduction as some of its Japanese factories due to continued chip shortages, and Samsung and Micron have indicated there will be output cuts due to recent Chinese closures of omicron infected areas (Xi’an). While certainly of concern, most of the news from the supply side has been upbeat, but we should be cognizant that the pandemic is not over and flare ups may further constrain supply. Nevertheless, here is the better news:
It should be noted that this picture could change abruptly depending on reactions from production factors and governments to omicron or other upcoming Covid variants. For example, the recent Chinese lockdown of the city of Xi’an (13 million population) are not yet in the data.
Service Sector: The financial media reports the rapid wage hikes in some of the service sectors as if they are economy wide. The latest Atlanta Fed Wage Tracker pinpoints the escalating wage issues to the lower educated and unskilled (mainly younger) in the services sector which is responsible for about 20% of the workforce. The other 80%? Not Much! (See the self-explanatory chart at the top.)
Service Sector Personnel Issues: Pre-omicron, service sectors like restaurants and airlines were re-approaching 2019 levels of activity. Omicron has had an impact, with Open Table reporting falling restaurant bookings and havoc occurring with airline schedules (cancellations) over the Christmas holiday weekend. However, with a majority of schools back to students in the classroom, many working mothers have begun to return to the workforce. We saw in the November jobs data that the Labor Force Participation Rate for young females rose, and we expect December’s numbers to continue to show such gains.PLAY Forbes Money About Connatix Read More Read More Read More Read More Read More Read More Visit Advertiser website GO TO PAGE
“Helicopter” Money: Much of current inflation has been caused by the policies of giving out free money of both the Trump and Biden Administrations. A simple example: A worker in a widget factory makes one widget per day. If laid off, the widget isn’t produced, but the worker has no income. Both supply and demand have fallen. By the government giving away free money, the widget didn’t get produced, but the worker still had income, and demand remained. The government produced demand/supply imbalance created inflation. That has now gone away. The last of the helicopter money went out in December in the form of “child care” tax credit payments (which are really pulled forward from 2021 taxes due next April!). Without “free money,” 2022’s growth rate will be impacted!
Corporate Greed: There have been reports of corporations taking advantage of the “inflation narrative” and raising prices (read: “profit margins”) at a faster rate than the cost of inputs because they know customers, having been saturated by the media with the “shortage” narrative, would not object, apparently happy to have product available at all. This is a problem that is solved by “competition” in a capitalistic economy.
Thus, it appears that, while inflation may be elevated for a couple more quarters, it ultimately will prove to be “transitory” in the sense of “not permanent” or “long-lasting.” (The term “transitory” appears to have gotten a bad name because of the need for “instant gratification” now imbued in U.S. culture.)
In past blogs, we have chronicled why we think that growth will disappoint, including:
State Initial Claims (NSA)Universal Value Advisors
The latest data include:
Fixed Income: The yield curve has flattened – short-term interest rates are rising due to an increasingly hawkish Fed while long-term rates are holding steady as the economic outlook softens. An “inverted” yield curve (short-term rates higher than long-term) has always resulted in recession. While we are still not there, a flattening yield curve serves as a first warning.
Equity: We end the year with the equity markets at or near record highs. But, under the hood, not all is healthy. Economist David Rosenberg points out that one-third of the stocks in the Nasdaq NDAQ +0.4% are 50% lower than their 200-day moving averages, and that over the past eight months, five stocks (AAPL, GOOGL, NVDA, TSLA, and MSFT) have accounted for half the SP 500’s total return. In addition, he points out that mutual fund redemptions and sales of ETFs have markedly increased of late.
History tells us that stocks take a breather, especially after three years of significant double-digit returns. The Fed has taken its first baby tightening steps with hasher moves scheduled for 2022. Equities usually react poorly to Fed tightenings, and this time, to compound the issue, the Fed will be tightening into a slowing economy (if, indeed, it follows through). History also tells us that, under such circumstances, a soft landing is highly unlikely.
As we pen this, 2022 is just a day away. We don’t know the future. Perhaps inflation quells before the first-rate hike and/or the omicron is less virulent, passes quickly, no new variant emerges, and the pandemic passes (wishes do sometimes come true, but not often!). But, back to Earth! We really must go with the odds which say:
Ultimately, inflation and economic growth are most influenced by long-term factors like demographics, debt, and technology (DDT). Short-term issues like “helicopter money,” government business mandates, and gargantuan federal deficits can influence economic growth. But as we have learned once again, unwanted and growth killing inflation results from such actions. Under current economic conditions, and with current economic policies and consumer attitudes, “disappointing” economic growth looks to be the most likely outcome for 2022’s economy.
(Joshua Barone contributed to this blog.)