In this very confusing and unusual macroeconomic environment, I offer one piece of advice: just follow the labor market. We can’t be in a recession if the labor market is strong, no matter what the GDP number is. And we also can’t beat inflation and have the Fed back off tightening until the labor market cools significantly. It does not…
a labor market slowdown to finally stop the economic overheating that's resulted in price spikes, supply shortages, and labor issues that are crippling the travel sector now as it was supposed to have its best summer ever. Inflation in 2023 will not be a story of commodity prices, but the cost of services-- especially essential, unavoidable services like healthcare, where labor costs are fast accelerating.
Inflation in that sense risks becoming more pernicious, more regressive, and less obvious to the naked eye than in food and energy costs if it continues to spread throughout the service sector on the back of the tight labor market. Remember, we still have more than 11 million job openings against six million unemployed workers. Fed Chair Powell is basically trying to destroy openings , in an effort to slow the wage gains that are pushing up the cost of everything.
The distinction might seem subtle, but there's a huge difference in getting wage pressures to fall to around 4% from the upwards-of-5% figures we've been seeing in the first half of the year. Four percent puts us more on track to hit the Fed's inflation target, and suggests the economy is normalizing. Still, it won't be the readings this month or next that settle the issue, but rather where we are three to six months out.
As a side note, it makes sense that ADP, which issues its own monthly private-sector jobs report, is taking this moment toin order to"retool" its survey, which has a woeful track record in predicting the official jobs release from the U.S. government. With so much at stake on the labor market, it's a make-or-break moment for the company to determine the best usage of its own data, or risk irrelevance.
So yes, it was encouraging to see smaller monthly increases in the Fed's preferred inflation gauge this morning, and the reset of commodity prices and inflation breakevens since late spring. But now, it's up to the labor market to fill in the rest of the story.
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