(Baird’s Ross Mayfield wrote the following piece in September2022)
A WHITE-HOT LABOR MARKET AND A CHALLENGE FOR THE FED
As we do every year, we’ll take Labor Day as an opportunity to review the state of the job market in the US (we’re never one to shy away from a half-decent gimmick). The good news is that the labor picture has been outright strong of late despite the persistence of Covid-19, cost inflation pressuring US firms, and geopolitical turmoil across the globe. We have added back all of the jobs lost during the pandemic (and then some), there are over 11 million job openings and wage growth is at multi-decade highs. But there are two sides to every story.
Recently, we wrote about the “good news is bad news” state of the job market. In normal times, a strong labor market means higher wages and consumer confidence – it is a fundamental underpinning of a healthy economy. But higher wages can also stoke inflation in a way that concerns the Federal Reserve. As we wrote, “In a world where a strong job market leads to robust wage growth and, ultimately, to price inflation (a classic wage-price spiral), the Fed will look on with caution rather than joy.” And with inflation at 40-year highs, we have surely reached that threshold.
Fed Chair Powell agrees, saying in a recent speech (that sent markets tumbling), “The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply.” Our partners at Strategas concur, writing, “Inflation is likely peaking, but the domestic labor market is still overheating and so the Fed remains hawkish. Wage inflation is driving sticky service prices. The Fed’s plan is to destroy job openings before destroying jobs (not easy).”
And this is the crux of the coming months. If the Fed can raise rates and bring down inflation without a commensurate rise in unemployment, it is a victory. Their path to doing so will be cooling the economy just enough that hiring slows and job openings dry up, but not so much that companies start laying people off. There’s not a great comparison for this across history, but there’s also no great comparison for the 11 million job openings reported in August. In many ways, we are in uncharted territory.
So here we stand today: with a white-hot labor market that is as much a boon to the US worker as it is a problem for the Federal Reserve. While there is a path for the Fed to land the plane (i.e., reduce inflation sans recession), it will be a difficult task. And to the extent that the stock market is moving on Fed and inflation news (very much so), this will be critical to watch going forward.
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