Disorder in the house, Time to duck and cover. ~ Warren Zevon
After several years of relatively
benign macroeconomic circumstances that are based on impressively large fiscal programs
and loose, rock-bottom interest rate monetary policy, the past year has become
more exigent.
First, several millions of us
have been engaged in the Great Resignation that’s contributed to an
ever-tightening labor market. Second, the government has spent over $5 trillion
(T) so far fighting an insidious ever-altering virus and passed a $1.2T decade-long
effort to improve our aging infrastructure. Spring’s hopes rest eternal. But notwithstanding
everyone’s hopes, Covid will not be going away, ever. Covid’s latest variant,
BA.2, is leaving its dark mark across the Atlantic and beginning to here, as
well. Let’s hope an added booster can make a difference.
In addition to the much-increased
public spending, frazzled supply-chains have also pushed annual inflation to the
highest levels in four decades; 7.9% at last measure. For the year ending
February 2022, the Federal Reserve increased nation’s money supply by 11%. Given
such loose money, together with Congress’s expansionary fiscal efforts, no one should
be surprised that inflation has risen.
Despite all-too-tardy statements
from the Federal Reserve Board’s chair Jerome Powell that inflation was “transitory,”
it has continued and grown. Oops. The current elevated inflation level will be
present for an extended period. In their overdue response, the Fed has just
begun raising its key interest rate (the Federal Funds Rate, FFR) by 0.25% and
started tightening our money supply, as depicted below.
As post-Friedman monetarists, Jerry P. and his Board buddies (as well as Joe B. in the White House) hope this FFR increase, together with expected later rises will soon temper inflationary price boosts. But not so much that the economy shifts into dreaded “stagflation” territory –stagnating growth concurrent with inflation.
Antediluvians like me remember
living through the nasty stagflation-full 1970s when oil prices rose big-time, together
with macro price upsurges and diminished growth. They were most definitely not
the good ol’ days, especially then. That bout of stagflation required the Fed to
launch a painfully corrective, multi-year recession to “cure” it.
This existing inflation is likely to be bad news not only for us consumers. It’s a grave omen for Dems’ November
election chances, especially after BBB became Build Back Never.
And that’s not all. For the past
month, the US has been fiscally fighting a war in Ukraine, an impressive young Eastern
European democracy. This horrific, unprovoked conflict is being waged by
Russia’s kleptomaniac modern-day Czar, Vladimir the Terrible.
Beyond horrible human suffering,
this war has fractured world commodity markets. That’s because Ukraine and
Russia are crucial suppliers of several important products. Together they
export over 25% of the world’s wheat, 16% of corn, 30% of barley and 80% of
sunflower oil and seed meal. No one now expects any of the winter wheat planted
last fall in Ukraine, the former “breadbasket of the Soviet Union,” to be
harvested this summer. Ukraine also provides about 50% of the world’s neon
supply, required for manufacturing microchips.
Russia is the world’s
third-largest oil producer behind the US and Saudi Arabia; the second-largest
producer of natural gas and supplies roughly 40% of the European Union’s
natural gas needs. Russia is the world’s top exporter of nickel (essential for EVs’
battery production) and palladium (required for cars’ catalytic converters).
Prices for these crucial
ingredients have risen significantly, which will soon add to many products’
costs beyond Ukraine or Russia. For example, two weeks after Russia’s incursion
into Ukraine the world price of wheat is no longer loafing. It soared 41.2%
above the pre-war price. Most recently the price of wheat settled to merely 23.3%
above that price. Ouch.
Let’s change the discussion from dismal
commodities to promising communities, focusing on recent changes in our harried
labor market. The Great Resignation began in April 2021, when almost four (4)
million workers quit their jobs. The quitters include older near-retirement Boomers
and a larger number of Millennials and Gen Zers. Principal reasons for their
departure included low pay, no advancement opportunities and feeling
disrespected at work.
But what’s happened to all these
people who’ve left their jobs during the Great Resignation? It’s hard to find
any direct information about whether the quitters have found more meaningful
and more respected jobs.
Pay has definitely risen. Labor
compensation across the US rose 5.5% in 2021, although after accounting for
inflation, 2021 real labor compensation fell 1.1% according to the Dept. of
Labor. Companies are paying higher wages as well as offering signing bonuses to
entice (and retain) workers. Fortuitously, this tight labor market seems to be
reducing pay inequality, as lower-paid workers’ compensation has risen more than
other workers’.
Nevertheless, the demand for
labor from employers continues to outstrip the availability of workers
interested in returning to the labor force. Thus, job prospects for workers are
brighter than they have been in several decades. Unfilled job openings in
February remained at near record levels. Workers who voluntarily resigned their
positions increased to 4.4 million last month.
A ”greener grass” factor also is
playing a role in workers’ quitting their current jobs. This factor may be most
driven by Gen Z, who now comprise more than one-quarter of the workforce, and
who might be joining a new firm thinking their new work-gig will be a more-fulfilling
dream job. After a short time, reality may strike.
A recent survey of new hires
found that almost three-quarters of them experienced either “surprise or
regret” that the new position or new company they quit their job for turned out
to be “very different” from what they were led to believe. Nearly half of these
workers said they would try to get their old job back.
Realistically, the grass more
often than not is pretty much the same color green at the
new job as it was before, despite hopefully better espresso. Particularly if
the newly-hired worker places importance on the company’s values matching their
own, and on the firm’s hints that plentiful career development opportunities
are very near their cubicle. This job change shock may be caused by a certain
amount of naivety among the Great Resignees. Also, it’s more likely to happen
in smaller firms, where satisfying such desirable but encompassing career goals
can be challenging.
Although there are no actual
numbers, it’s likely that a fair number of resignees decided to go their own
way and establish their own new businesses. After all, American commerce is
replete with memorable tales of adventurous entrepreneurs succeeding after
beginning in a garage or similar petite places. New applications for federal
tax ID numbers jumped 56% in the past two years. There’s been a 5.3% increase
in the number of self-employed workers. This may be an impressive set of new
entrepreneurs, a few of whom may beat the large odds and succeed. The Small
Business Administration’s data show that 90% of start-up businesses fail
sometime during their first five years.
My bet is that workers will soon begin to boost their so far leisurely return to working. Why would this loosening of the labor market happen? Three reasons; first, evermore workers who have been sitting on the labor market’s sidelines have depleted the stimulus check funds’ cash they received last year. Second, labor-force participation for workers aged 25 through 64 has been steadily rising, and is now close to what it was 18 months ago. These folks have not resigned and withdrawn from working. Instead, most folks who’ve “resigned” have actually been frictionally unemployed, and rapidly found new, presumably better jobs. March unemployment was at a rock-bottom 3.6%; employment rose by 431,000 folks.
Third, total household debt last
year increased almost 7%, the largest annual increase in over a decade. Car
loans are a large factor; the hyperactive housing market and booming
credit-card balances are others. Receiving paychecks will help America’s
households that are on the fiscal hook for delivering larger monthly debt
payments.
The loosening labor market and tighter money – the opposite of what we’ve recently lived with – can lead to better days, the sooner the better. Let’s hope the Fed can somehow thread its monetary needle into a macroeconomic soft-landing without a trace of recession. Otherwise it’s time to duck and cover, as Warren Zevon declared.
