Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Labor Hoarding Trap Distorting Wages
Transcript
- Lucas: Look at the numbers coming out of September, specifically the divergence between job openings and payrolls. We have nonfarm payrolls ticking up by just twenty nine thousand, yet job openings surged to seven thousand five hundred twenty three thousand. That is a massive gap, and it tells a story about where the labor market is actually heading. Luna: Right, so employers aren't firing, but they also aren't hiring aggressively. It feels like a holding pattern rather than a contraction. Lucas: Exactly. This is classic labor hoarding. Companies are keeping workers on the books even when productivity isn't matching up with revenue growth. You see it in the average hourly earnings data, which rose to thirty seven point eight dollars. When wages stay sticky while output slows, you get that inflationary pressure the Fed hates. Luna: But isn't that just businesses being cautious? If they fire people now, rehiring later will be expensive and difficult. Lucas: It is, but there's a cost to that caution. Real GDP grew at an annualized rate of three point four percent in the third quarter, which sounds strong, but look closer at the components. The nominal GDP is thirty three trillion zero one billion, but the core PCE price index is still climbing at one point six percent year-over-year. That wage bill is eating into margins. Luna: So the efficiency gains we expect from automation or restructuring aren't happening fast enough to offset those payroll costs. Lucas: Precisely. And this brings us to the ten-year Treasury yield dropping to four point ninety five percent. The market is pricing in slower growth because investors realize that hoarded labor is a drag on future profitability. It's not that the economy is crashing; it's that it's becoming less productive per dollar spent. Luna: Does the FOMC care about productivity if inflation stays above target? They seem focused purely on the price side. Lucas: They absolutely care, because wages drive prices. With the Fed Funds effective rate sitting at three point eighty eight percent, the monetary stance is restrictive, but if labor costs keep rising, the central bank may have to hold rates higher for longer. We saw the European Central Bank keep rates on hold recently, but here, the domestic wage pressure is unique. Luna: And with the unemployment rate nudging up to four point two percent, isn't there room to cut without reigniting inflation? Lucas: That's the trap. The unemployment rate is up only marginally, but the quality of jobs has shifted. We're seeing fewer new hires and more retention of existing staff. If the Fed cuts now, those hoarded workers don't disappear instantly. They spend their wages, keeping demand hot, which keeps inflation stuck around that two percent breakeven mark we're seeing in the markets. Luna: So the labor market is acting as a brake on disinflation, even though headline unemployment looks okay. Lucas: Correct. And look at the initial jobless claims, which dropped to one hundred ninety four thousand. That suggests layoffs are rare. When people don't lose their jobs, they don't shop around for cheaper options, and firms don't feel the pressure to reduce costs. It creates a floor under inflation that is very hard to break. Luna: I wonder if this hoarding is sector-specific. Is it hitting tech and finance harder than healthcare or services? Lucas: It's broad-based, but it shows up differently. In knowledge-intensive sectors, the cost of losing institutional memory is high. So managers hoard talent. But in retail or logistics, the data shows similar patterns. Average hourly earnings are up across the board, meaning even lower-wage sectors are feeling this pinch, which feeds directly into the CPI basket. Luna: Which means the consumer isn't feeling the relief of lower prices yet, despite the stock market drop. Lucas: Not at all. The S&P 500 is down two point three percent over the last week, and the Nasdaq is down four point four percent. Investors are selling risk assets because they see the profit margin squeeze. But your grocery bill and your service costs aren't dropping. The disconnect between asset prices and everyday inflation is widening. Luna: It seems like the 'soft landing' narrative is getting complicated. You can have low unemployment without low inflation if wages are rigid. Lucas: That's the key insight. A soft landing requires wages to cool down so prices can stabilize. If wages stay hot, you either get reaccelerating inflation or a harder recession when the Fed finally forces the issue. We are currently in that uncomfortable middle ground. Luna: Given the JOLTS data showing seventy five hundred twenty three thousand openings, do you think employers will start cutting soon? Lucas: Probably not immediately. The benefit to cost ratio of firing right now is terrible. Interest rates are still relatively high, making severance packages expensive, and finding replacements is slow. So we'll likely see this hoarding continue through the fourth quarter, keeping the pressure on the Fed. Luna: So the next few employment reports will be critical. If payroll growth stalls but wages keep rising, that's a red flag. Lucas: Exactly. We need to see a decoupling where hours worked decline before unemployment rises significantly. That's the signal that productivity is catching up with headcount. Until then, the Fed has its hands tied. Luna: It makes me think about the long-term impact on business investment. If margins are compressed by labor costs, they might delay expansion plans. Lucas: You're spot on. Capital expenditure tends to lag labor decisions, but once companies realize they can't grow organically due to cost structures, they become pickier about M&A and new projects. We might see a consolidation phase emerge from this inefficiency. Luna: Consolidation sounds like a way to fix the balance sheet, but it doesn't help the broader macro picture. Lucas: No, it doesn't. It just shifts risk from many small players to fewer large ones. And given the current volatility in the Dow and the Russell 2000, that concentration of risk is concerning for the wider economy. Luna: One final thought: does this hoarding behavior make the economy more resilient to shocks, or just slower? Lucas: It makes it more resilient in the short term because employment doesn't collapse, but slower in the long term because resources aren't flowing to their most productive uses. It's a stability tax we pay for uncertainty. Luna: A stability tax. I like that. It captures the trade-off perfectly. Lucas: Thanks for listening. If walking through the economy with us has made something click, consider supporting the show directly. It helps us keep these deep dives ad-free and allows us to bring you this kind of detailed analysis every day. You can find us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: We really appreciate the community that supports independent economic journalism. It makes a huge difference in how we can cover these complex topics. Lucas: Back to the data. Let's look at the PPI for a moment, which often leads CPI. If wholesale prices remain elevated due to those same labor costs, we might see a revision in the core inflation reading next month. Luna: Do you think the market is already pricing in a potential upside surprise for inflation? Lucas: The ten-year breakeven is at two point twenty nine percent, which is down slightly. So the market thinks we're okay, but the underlying wage data suggests otherwise. It's a dangerous disconnect. Luna: So investors are betting on the Fed to deliver the disinflation, while the labor market is telling a different story. Lucas: Precisely. And history shows that when the Fed fights a wage-driven inflation, it usually takes a recession to break the cycle. We're hoping for a voluntary correction, but the odds are against it. Luna: Let's hope the data surprises on the downside, but I'm watching those job openings closely. Lucas: Same here. One last thing: keep an eye on the ISM Services PMI. If it starts falling below fifty, we'll know the hoarding is ending. Luna: Agreed. Until then, it's a wait and see game. Lucas: We'll be tracking it. Thanks for tuning in today.