Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Productivity Mirage In Stagflation
Transcript
- Lucas: Look at the numbers coming out of September. Core CPI is sitting at 338.9, barely budging from where it was a month ago, while the unemployment rate has ticked up to 4.2 percent. That is the classic stagflation handshake: prices refusing to cool down even as the labor market shows its first real signs of fatigue. Luna: Right, and what’s striking is that the job openings number dropped sharply to 7,079 thousand. It’s not a crash, but it’s a clear deceleration that usually precedes broader layoffs. Are companies just squeezing harder before they start cutting? Lucas: Exactly. And that brings us to the specific angle I want to drill into today: the 'productivity mirage.' We’ve seen corporate earnings hold up surprisingly well despite the macro headwinds. But if you look closer, a lot of that resilience isn’t coming from genuine innovation or efficiency gains. It’s coming from pricing power and cost-shifting. Luna: So you’re saying the profit margins on the balance sheets don’t match the lived experience of workers? Because average hourly earnings only rose to thirty-seven dollars and eighty cents. Lucas: Precisely. Real wages have been flat or negative for most households when you adjust for that persistent inflation. Companies are maintaining margins by keeping prices high, not by becoming more productive. It’s a zero-sum game where the consumer pays the premium, and the worker gets squeezed. We saw this dynamic clearly in the 1970s, but the mechanisms are different now. Luna: How so? In the seventies, it was often oil shocks and strong unions driving costs up. Today, we’re talking about tech-enabled pricing optimization and supply chain bottlenecks that never really cleared. Lucas: It’s less about physical constraints and more about behavioral ones. Firms have learned that demand is somewhat inelastic in certain sectors. They raise prices, and consumers pay because there’s no alternative. This allows them to protect their bottom line without needing to invest in capital expenditures that would boost actual productivity. It’s lazy growth, effectively. Luna: That sounds like rent-seeking behavior again, which we covered recently, but with a technological twist. Is AI part of this mirage? We hear about massive AI investments everywhere. Lucas: AI is definitely part of the narrative, but the data doesn’t show a productivity boom yet. If anything, the heavy capex spending on AI infrastructure is masking the lack of organic operational efficiency. Companies are betting big on future returns that haven’t materialized in the current quarter-over-quarter results. Meanwhile, the rest of the business runs on the same old margin-preserving tactics. Luna: But wait, didn’t nominal GDP grow by 2.2 percent annualized in the second quarter? That seems like healthy growth, doesn’t it? Lucas: Nominal GDP is misleading here because it includes inflation. Real GDP, adjusted for price changes, is growing at that same 2.2 percent, which is solid but not exceptional. The problem is distribution. That growth is concentrated in the top tiers of corporate earnings, while the median household sees little benefit. It’s a divergence that fuels political and social instability. Luna: And that instability makes the Fed’s job harder. They can’t cut rates to stimulate hiring without reigniting inflation, but they can’t keep rates high forever if businesses start cutting back on investment. Lucas: Spot on. The Fed is trapped in a narrow corridor. If they ease too much, we see the inflation expectations embedded in those ten-year breakevens at 2.34 percent jump higher. If they stay tight, the labor market softens further, and those job losses accelerate. We’re seeing initial claims drop to 194,000, which is good, but it’s a lagging indicator. Luna: It’s a lagging indicator, yes, but also a fragile one. Once layoffs start, they tend to cascade. Do you think we’re heading toward a more severe downturn, or is this just a prolonged grind? Lucas: I think it’s a prolonged grind, but with a risk of sudden acceleration. The 'mirage' holds until it doesn’t. When consumers finally break under the weight of stagnant real wages, demand will collapse abruptly. We’ve seen hints of this in the housing sector, where warning signs are flashing just as the Fed weighs more rate hikes. Luna: Housing is such a sensitive barometer. If mortgage rates stay elevated and incomes aren’t keeping pace, affordability becomes impossible. That drags down construction, manufacturing, and related services all at once. Lucas: Correct. And unlike the 1970s, where wage-indexed contracts pushed inflation forward, today’s inflation is sticky because it’s structural. Supply chains are fragmented, energy costs are volatile, and labor markets are demographically constrained. These aren’t temporary glitches; they’re permanent shifts in the cost structure. Luna: So the productivity miracle isn’t happening because the foundations are shifting beneath our feet. We’re trying to build on sand. Does this mean we should be more cautious about equity valuations right now? Lucas: Valuations are tricky. The S&P 500 is hovering around 7,624, down nearly a percent over the last five days. Tech stocks are under pressure, but some sectors are holding up due to sheer necessity. The key is to distinguish between companies creating real value and those just extracting rent through pricing power. The latter will suffer when demand finally cracks. Luna: Extracting rent until the well runs dry. That’s a vivid way to put it. What about small businesses? They don’t have the same pricing power as large corporations. Are they getting crushed? Lucas: Small businesses are absolutely getting squeezed. They face higher borrowing costs, similar input price increases, but cannot pass those costs on to customers as easily. The Russell 2000 is up slightly over the week, but that’s volatility, not trend. The underlying health of the small business sector is deteriorating faster than the headline numbers suggest. Luna: It’s interesting how the narrative focuses so much on the big players. The real pain point might be the mid-market economy, which drives local employment and community stability. Lucas: Absolutely. And when the mid-market falters, it reduces the diversity of innovation. Large firms become even more dominant, leading to less competition and potentially higher prices for longer. It’s a self-reinforcing cycle of consolidation and stagnation. Luna: Does government policy do anything to break that cycle? Or are we just waiting for the market to correct itself? Lucas: Policy is largely ineffective in the short term. Fiscal stimulus often just adds to demand without addressing supply constraints, worsening inflation. Structural reforms take years. So for now, we’re left with the market correcting itself, which means a painful adjustment period for investors and workers alike. Luna: A painful adjustment. So the lesson for listeners is to watch their cash flow closely and avoid over-leveraging? Especially if they work in sectors reliant on consumer discretionary spending. Lucas: Yes, liquidity is king. And diversification away from pure growth stocks into assets that provide real yield or protection against inflation. Gold, for instance, is down significantly over the week, trading near 4,008 per ounce. It’s a correction, but long-term, gold remains a hedge against currency debasement and stagflationary environments. Luna: Gold dropping might give some false confidence that inflation is beaten. But as we said, core CPI isn’t moving much. It’s a deceptive calm. Lucas: Deceptive, yes. The market is pricing in a soft landing that may not exist. We need to prepare for the possibility that the 'mirage' dissipates quickly, revealing the harsh reality underneath. That reality is a slower, more uneven recovery with persistent price pressures. Luna: It feels like we’re standing on the edge of a cliff, watching the fog lift slowly. You can see the drop, but you don’t know exactly when you’ll slide off. Lucas: That’s a good analogy. And it reminds me of something important. If walking through the economy with us has made something click, remember that listener support is what keeps these conversations going. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Yeah, it really does help sustain the deep dives into these complex topics. Thanks for considering it. Lucas: Back to the cliff edge. As we look ahead to the next quarter, the critical variable will be wage growth. If wages start to catch up with prices, we might see a surge in consumer spending that boosts growth. But if they stay flat, we’re looking at a deeper contraction. Luna: Which brings us back to the labor market data. Those 7,079 thousand job openings are shrinking. Fewer openings usually mean weaker bargaining power for workers, which keeps wages down. Lucas: Exactly. It’s a vicious cycle. Weak labor markets suppress wages, which suppresses demand, which hurts corporate revenues, which leads to more layoffs. Breaking this cycle requires an external shock, either positive or negative. Until then, we’re stuck in the mirage. Luna: So the question isn’t just whether we’ll escape stagflation, but how ugly the exit will be. And whether we can build a new foundation of productivity that actually benefits everyone, not just shareholders. Lucas: That’s the million-dollar question. For now, stay vigilant, keep your expenses lean, and keep listening. Next time, we’ll dive into how demographic shifts are reshaping the workforce in ways we haven’t fully accounted for yet.