July 11, 2022
We're back for a big week of Macro news. But first, today, the whipsawing labor market and potentially good news in a new survey of inflation expectations.
Situational awareness: Kansas City Fed President Esther George warned in a new speech this morning that "there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year."
- This suggests to her that the Fed could be raising rates more quickly than the economy can handle.
Today's newsletter, edited by Kate Marino, is 693 w0rds, a 2½-minute read.
1 big thing: How 2020 still haunts the labor market
To understand why employers in a wide range of industries are struggling with historic labor shortages, look back to the early days of the pandemic.
- Decisions made in 2020 to cut staff appear to be a root cause of many 2022 frustrations.
Why it matters: The industries hardest hit at the pandemic's onset — think restaurants, hotels or airlines — are now those seeing demand boom. Even with higher pay, they're struggling to replace the workers they laid off, who may have moved to other industries where the pay is comparable (or even higher) and working conditions are better.
Between the lines: The worker shortage has pushed businesses to raise wages rapidly, which has, in turn, kept inflation elevated. This dynamic has been more subdued in the eurozone — and a reason why may date back to policies implemented early in the pandemic.
- "In Europe, when the economy rebounded, they could jump back toward full employment with minimal inflation in the labor market," says Paul Gruenwald, chief economist at S&P Global Ratings.
- "In the U.S., we let the market clear and we have had a really difficult time reassembling the labor market in a non-inflationary fashion."
Flashback: European nations encouraged firms to adjust to the COVID shock by cutting hours, rather than employment. In contrast, the U.S. relied on expanded unemployment benefits and direct income support, while small firms had labor costs covered through the Paycheck Protection Program loans.
- Countries like France, Germany, Italy and Spain implemented job retention programs that kept workers connected to firms.
- The eurozone labor force participation rate has surpassed its pre-pandemic level, while the rate in the U.S. has not.
- The policies encouraged "labor hoarding," according to an IMF paper released earlier this year. Job shedding was roughly equal to that of the global financial crisis, despite a bigger blow to economic activity.
In the U.S., this tension resonates particularly in the airline industry.
- The government payroll support program banned industry players from laying off workers, though they could still incentivize workers to leave voluntarily as travel demand remained soft. Now that demand has whipped back, they're racing to fill that labor gap, with staffing shortages fueling miserable travel conditions.
- Airports are understaffed, and major airlines are collectively thousands of workers shy of pre-pandemic levels, according to the latest employment figures reported to the Department of Transportation.
Worth noting: This is not to say Europe isn't facing any labor shortage issues of its own. For instance, airports and airlines there, too, are struggling to re-up operations and fill the positions left open when the pandemic hit. In the U.K., Brexit consequences are contributing to diminished labor supply.
The bottom line: Industries' reactions to the economic shock may still be haunting them.
2. How Americans' inflation outlook is changing
With the Federal Reserve intent on keeping high inflation from becoming entrenched, surveys of Americans' views on future inflation have become uncommonly important in shaping policy.
- The latest such reading offers what are — at first glance, at least — weird mixed signals. But there may be a coherent, good-news story out of them.
Driving the news: Americans' inflation expectations in the year ahead spiked in June, according to the New York Fed's Survey of Consumer Expectations. But their expectations for inflation in the medium- and long-run fell.
Between the lines: There's a potential coherent story here. Gas prices peaked in mid-June, so it stands to reason people were pessimistic about inflation over the next year.
- However, the news was also full of headlines about rising recession risk and the Fed's determination to stamp out inflation.
- It's plausible that Americans simultaneously started to expect higher inflation in the near term due to rising gas prices while becoming more confident that it will come down in the years ahead.
- Survey respondents also pulled back on their expectations for their own household spending over the coming year — now expecting 8.4% growth, down from 9% in May. That's good news for the Fed as it tries to tamp down excess demand in the economy.
Yes, but: These shifts, while potentially positive for the Fed's anti-inflation campaign, could simply reflect the statistical randomness inherent in any survey of 1,300 households.