Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Blue-Collar Workers Are Winning the AI Economy
Transcript
- Lucas: The Russell 2000 is up more than 3 percent over the past five trading days. That's the small-cap index — the companies that actually build stuff, fix stuff, move stuff. And I think it's telling us something about where the economy is heading. Luna: Because small caps are more exposed to domestic demand and less to the big tech names that dominate the S&P. So the rotation makes sense if you believe the AI economy is finally trickling down to Main Street. Lucas: Exactly. The headline we keep seeing is 'AI will replace jobs.' And yes, it will replace some — but it's also creating a new wave of demand for blue-collar workers. Technicians who install and maintain the hardware. Electricians who wire the data centers. Mechanics who keep the delivery fleets running. Luna: So the narrative that AI only helps white-collar knowledge workers — that's missing the bigger picture? Lucas: I think so. Look at the latest JOLTS data. Job openings fell to 6.866 million in March, down from 6.922 million. But the quits rate — that's workers voluntarily leaving — stayed elevated. That tells me workers still feel confident they can find a better opportunity. And the sectors driving that confidence are construction, transportation, and manufacturing. Luna: And average hourly earnings ticked up to $37.40. That's a 2.6 percent annualized gain — not huge, but positive in real terms if inflation keeps edging down. Lucas: Right. The 10-year breakeven inflation rate is 2.40 percent. That's the market's expectation for average inflation over the next decade. It's been creeping up, but it's not alarming. So wage gains aren't being fully eaten by price increases — at least not yet. Luna: But we have a new Fed chair taking over this week. Kevin Warsh gets sworn in on Friday. He's known as a hawk. Could he slam the brakes on this rotation? Lucas: That's the key question. Warsh has talked about the importance of 'normalization' — raising rates to pre-crisis levels. But the effective fed funds rate is 3.64 percent. That's already restrictive. If he pushes too hard, he could choke off the very investment in AI infrastructure that's creating these blue-collar jobs. Luna: So it's a balancing act. The Fed wants to contain inflation — core CPI is at 335.4, still sticky — but they don't want to kill the labor market. Lucas: Precisely. And here's the concrete number I keep coming back to: the JOLTS openings to unemployed ratio. In March, there were about 1.1 job openings per unemployed worker. That's down from the peak of 2-to-1 in 2022, but it's still above the pre-pandemic level of 1.2. Workers still have some leverage. Luna: But that leverage is concentrated in certain sectors. If you're a software engineer, maybe you feel the heat. If you're an HVAC technician or a solar installer, you're in high demand. Lucas: Exactly. And those are jobs that can't be offshored. You can't fix a broken AC unit from Bangalore. You can't install a solar panel remotely. So the AI economy is actually reinforcing the value of physical presence and manual skill. Luna: That's a pretty optimistic view. But what about the downside? AI also automates some manual tasks — warehouse picking, inventory scanning, even some aspects of driving. Lucas: That's real. But historically, automation has destroyed some jobs while creating others that require more skill and pay better. The key is whether workers can retrain. And the data shows that companies are investing more in training for technicians than for office workers. Luna: And the small-cap rally reflects that. The Russell is up 3.4 percent in five days. That's a bet on domestic industrials, materials, and services — the sorts of companies that hire blue-collar workers. Lucas: Exactly. Meanwhile, the S&P 500 is up only 1 percent. The big tech names are still doing fine, but the market is broadening out. That's usually a healthy sign. Luna: But if Warsh raises rates, that could hit small caps harder because they're more sensitive to borrowing costs. Lucas: Yes. The Russell is more leveraged. But if the economy is actually growing — real GDP growth annualized at 2 percent, nominal GDP at $31.8 trillion — then small caps can handle higher rates as long as the growth is real. Luna: So the narrative is: AI creates demand for physical infrastructure, that creates blue-collar jobs, which supports wage growth and consumer spending, which drives small-cap earnings. And the Fed just has to not mess it up. Lucas: That's the bull case. And I think there's something to it. But we should be clear: the quits rate is still below its 2022 peak. Workers are confident, not exuberant. And job openings are declining, even if they're still above pre-pandemic levels. Luna: So the labor market is cooling, but from a very hot level. It's normalizing. Lucas: Normalizing is the right word. And a normalizing labor market is actually good for the Fed. It means they don't have to slam the brakes. They can just hold steady. Luna: That feels like a good moment to mention something. We keep this show ad-free by choice. And a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo — that's literally what funds these conversations. Lucas: Yeah, it's a small but meaningful way to keep the show independent. If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Luna: Alright. Back to the data. One more number I want to highlight: the unemployment rate is 4.3 percent. That's low by historical standards, but it's been flat for months. What does that tell us? Lucas: It tells me the labor market is at full employment — or close to it. The fact that it's not rising is good. The fact that it's not falling suggests we're near the natural rate. And with the fed funds rate at 3.64 percent, monetary policy is slightly restrictive, but not aggressively so. Luna: So the economy is in a sweet spot? Growth is solid, inflation is moderate, and the labor market is tight but not overheating. Lucas: It's about as close to a soft landing as you can get. But the risks are still there. The Iran war is driving energy uncertainty and consumer sentiment hit a record low last week. That could spill over into spending. Luna: Consumer sentiment is a sentiment indicator — it doesn't always predict actual spending. But it's worth watching. Lucas: Absolutely. And the consumer is still spending. Nominal GDP is up. Retail sales have been steady. So the disconnect between sentiment and behavior is real. Luna: Maybe consumers are anxious about the headlines but their own financial situation is still okay. Lucas: That's exactly what the data suggests. Their jobs are secure, their wages are rising, and their savings, while lower than pandemic peaks, are still above pre-2020 levels. Luna: So the blue-collar worker is actually in a stronger position than the headlines suggest. Lucas: I think so. And that's the angle we should keep watching. If the Russell keeps outperforming, if job openings stabilize, and if wage growth stays positive in real terms, then the AI economy is delivering on its promise for more than just the tech elite. Luna: And if Warsh signals a pause at his first meeting, that could add fuel to the rotation. Lucas: Exactly. His first FOMC meeting is in June. The market will be parsing every word. But for now, the data is telling a pretty coherent story: Main Street is catching up. Luna: That's a good note to end on. Let's see how it plays out.