Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Strong Jobs Hide Weak Wages
Transcript
- Lucas: Let’s look at the headline from Friday morning: one hundred sixty-five thousand jobs added in October, with the unemployment rate dipping to four point one percent. On the surface, it looks like the labor market is still humming along, right? Luna: It does, but I’ve been digging into the sub-components. The sheer volume of hires is high, but what about the turnover? That usually tells us who’s actually getting paid more. Lucas: Exactly. And that’s where the disconnect starts to show. Average hourly earnings for private industry only rose by three cents month-over-month to thirty-eight dollars. When you annualize that, it’s barely keeping pace with the core CPI print of two point eight percent. We’re seeing job growth without the wage premium that usually accompanies it. Luna: So companies are hiring aggressively but refusing to raise base pay? That sounds like they’re relying on existing staff rather than bringing in fresh talent at higher rates. Lucas: Precisely. It’s the classic labor hoarding dynamic again. Firms are retaining employees because firing is difficult and morale is fragile, but they aren’t expanding the payroll budget enough to offer meaningful raises. They’re essentially buying stability instead of growth. Luna: And that stabilizes inflation on the upside just enough to keep the Fed cautious, while workers feel stuck. It’s a weird equilibrium. Lucas: It is. If you look at the JOLTS data, job openings ticked up to seven million five hundred twenty-three thousand, yet quits remain low. People aren’t leaving their jobs because they don’t have better offers elsewhere. They’re staying put. Luna: That makes me wonder if this 'quiet' wage freeze is actually more dangerous than a sharp drop in hiring. At least a layoff wave forces a correction. Lucas: I think so. A layoff wave shocks the system. This slow bleed keeps the economy muddling through. Real GDP grew three point four percent last quarter, which is strong, but it’s driven by consumption and inventory build, not productivity-led wage increases. Luna: Right, and if wages aren’t growing, consumers are eating into savings or using credit cards. That’s not sustainable fuel for a three percent GDP growth rate. Lucas: Exactly. And that’s why the S&P 500 took a hit yesterday. Investors are realizing that corporate margins might be propped up by suppressed labor costs, but eventually, those costs catch up. Or worse, consumer demand snaps under the weight of stagnant real income. Luna: It feels like the market is pricing in a soft landing, but the labor data suggests a very slow crawl rather than a smooth glide path. Lucas: That’s the key tension. The Fed sees the three point eight eight percent effective funds rate and thinks, 'Good, inflation is moderating.' But they might be missing the structural rigidity in the labor market that prevents disinflation from accelerating. Luna: So the Fed could stay patient longer, assuming the lack of wage pressure will naturally cool things down. Is that a safe bet? Lucas: It’s risky. Because if a supply shock hits—like another geopolitical disruption or an energy spike—the lack of wage flexibility means businesses can’t absorb the cost without raising prices. There’s no buffer in the household balance sheet. Luna: And since nominal GDP is sitting at thirty-three trillion dollars, the velocity of money has to come from somewhere. If people aren’t earning more, they’re spending less discretionary cash. Lucas: Which brings us back to the services sector. That’s where the wage pressure usually lives. Healthcare, hospitality, professional services. If those sectors aren’t paying more, the broader index stays flat. But service inflation is stickier than goods inflation. Luna: Because you can’t outsource a nurse or a waiter as easily as you can outsource a widget manufacturer. Labor is local and rigid. Lucas: Spot on. So when we see core CPI holding at three hundred thirty-eight, it’s largely because services prices are firm. And services prices are firm because wages aren’t falling, even if they aren’t rising fast. Luna: It’s a floor, not a ceiling. As long as wages don’t drop, inflation doesn’t collapse. It just lingers. Lucas: And that lingering is what keeps the ten-year Treasury yield near four point eight six percent. Bond markets are demanding compensation for that persistent inflation risk. Luna: Do you think employers realize they’re playing with fire here? Keeping wages flat might save them cash today, but it kills retention tomorrow. Lucas: Some do, but the competitive landscape is confusing. If everyone is hoarding labor, no one wants to be the first to raise prices for fear of losing market share. It’s a prisoner’s dilemma on a macro scale. Luna: So the solution isn’t necessarily aggressive hiring, but maybe targeted retention bonuses? That would boost the numbers without committing to permanent base pay hikes. Lucas: That’s exactly what’s happening. Short-term incentives are up, but base salaries are flat. It’s a way to manage the optics and the immediate churn without altering the long-term cost structure. Luna: But does that actually help the consumer? If I get a bonus, I spend it. If my rent goes up, I’m still broke. It feels like a temporary fix for a structural problem. Lucas: It is. And that’s why the real story isn’t the number of jobs created, but the quality of those jobs. Are they building wealth for households, or just maintaining status quo operations? Luna: If it’s the latter, then the three point four percent GDP growth is mostly corporate efficiency, not household prosperity. That’s a tough sell for voters. Lucas: Very much so. And given the political headwinds we saw last week, policymakers are watching this closely. They need to show that the economy is working for the median worker, not just the aggregate. Luna: So the Fed has to walk a tighter line. Cut rates too early and inflation rebounds. Wait too long and the labor market cracks under its own weight. Lucas: Exactly. The margin for error is shrinking. Every data point from here on out is going to be scrutinized for signs of that wage acceleration—or the lack thereof. Luna: I’ll be watching the next CPI release closely. If services inflation ticks up despite flat wages, it confirms your hoarding thesis completely. Lucas: Agreed. It’s a delicate dance between corporate profitability and household purchasing power. And right now, the scales are tipping toward the former, but not by much. Luna: One final question though: if this trend continues, do we see a sudden burst of inflation once wages finally catch up? Or does the damage get done quietly over time? Lucas: That’s the big unknown. History suggests it’s rarely quiet. When pent-up wage pressure finally releases, it tends to happen all at once. We just hope it doesn’t coincide with a slowdown in demand. Luna: A perfect storm. Well, let’s hope the data surprises us in the right direction. Until then, we’ll keep tracking the numbers. Lucas: We will. Thanks for listening, Luna. Let’s dive into the donation segment. Luna: If walking through the economy with us has made something click... Lucas: and you want to help keep these daily conversations ad-free and independent, you can support us directly. Head to buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Any contribution helps us keep digging into these deeper macro trends without distraction. Thanks for being part of the network. Lucas: Back to the data. One thing that stands out about this labor hoarding is how it affects small businesses differently than large caps. Luna: Right, smaller firms have less cash buffer. They can’t hoard labor as easily. Does the data show a divergence there? Lucas: It does. The RUT is down slightly, and many small caps are pulling back on hiring entirely. It’s a bifurcation of the labor market. Luna: So the 'strong jobs' headline is really just the largest employers carrying the weight. Interesting distinction. Lucas: Very interesting. And it suggests the underlying resilience might be narrower than we think. Luna: Something to keep in mind as we watch the rest of the quarter unfold. Lucas: Absolutely. We’ll see you tomorrow with more insights.