Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why October Jobs Data Masks Wage Stagnation
Transcript
- Lucas: Look at the October jobs report released Friday. The headline number was strong: one hundred sixty-five thousand new jobs added, and the unemployment rate slipped down to four point one percent. On paper, the labor market looks robust. Luna: But you’re seeing the same thing I am. If you dig into the payroll data, average hourly earnings only ticked up to thirty-eight dollars. That’s barely moving. Lucas: Exactly. We’ve spent the last few weeks talking about low firing rates and labor hoarding, but this month reveals a deeper structural issue. Companies are keeping people on the books, yes, but they aren’t raising wages to match the scarcity of talent anymore. It’s a wage freeze disguised as stability. Luna: That’s a sharp distinction. So instead of competing for workers with higher pay, firms are just absorbing them into lower-growth roles? Lucas: Precisely. And it’s happening even as real GDP accelerated to three point four percent annualized in the third quarter. Usually, when the economy grows that fast, you see wage pressure. Here, productivity isn’t keeping pace, so margins are being protected by suppressing pay growth rather than driving innovation. Luna: It feels like we’re hitting a ceiling where job count matters less than actual income generation. How does the Fed view this divergence right now? Lucas: The Federal Reserve is stuck in a holding pattern. The effective Fed Funds rate is sitting at three point eight eight percent, essentially flat since October first. They’re waiting to see if this wage stagnation bleeds into broader inflation. Core PCE is still sticky at one hundred thirty point nine, but the lack of wage acceleration suggests the inflationary spark might be dying out. Luna: So why did the markets sell off? The S&P 500 dropped two point two percent over the last five days despite good employment data. Lucas: Because investors are realizing that more jobs don’t equal more spending power if those jobs don’t come with raises. When wages stagnate, consumer demand softens. You can hire everyone you want, but if nobody has extra cash to spend on services or goods, revenue growth stalls. It’s a demand-side trap. Luna: That makes sense. The labor market is warm, but the wallet is cold. Is this visible in specific sectors yet? Lucas: Mostly in professional and business services. We’re seeing fewer high-salary tech hires and more retention-focused restructuring. Meanwhile, the JOLTS data shows job openings actually rose to seven million five hundred twenty-three thousand. Employers are advertising, but they’re not offering the premium pay they used to. Luna: Advertised vacancies without premium pay? That sounds like a mismatch between skill sets and willingness to train. Lucas: It’s likely a mix of both. Firms are cautious about committing to long-term salary escalations because they’re unsure about the trajectory of interest rates. With the ten-year Treasury yield hovering around four point eight six percent, borrowing costs remain elevated. That discourages expansion and encourages cost-cutting, which includes freezing wage budgets. Luna: I wonder if this explains the initial jobless claims drop to one hundred eighty-nine thousand. People aren’t quitting because they know there aren’t better offers out there. Lucas: Spot on. When wages aren’t growing, the incentive to leave your current job vanishes. Quit rates plummet. This creates a static labor market where efficiency drops because people stay in roles they’ve outgrown, and companies fill seats with underqualified candidates because they can’t afford the top tier. Luna: It’s a weird equilibrium. Stability without progress. Does this change how you’re looking at the upcoming inflation prints? Lucas: It definitely tempers the outlook. The CPI came in at three hundred thirty-six point three in September, up slightly from the prior month. But with wages stagnant, we shouldn’t expect a surge in service-sector inflation. The risk shifts from overheating to stagnation. In other words, sticky prices but falling velocity. Luna: Sticky prices and falling velocity. That sounds like the early stages of a mild recessionary cycle, even if GDP numbers look fine. Lucas: Or what economists call 'soft landing' fatigue. The data looks okay on the surface, but the underlying mechanics are weakening. Investors are pricing in that reality, hence the pullback in the Dow and the NASDAQ. They’re discounting future earnings because they anticipate weaker consumer consumption later this year. Luna: So the strong jobs report is actually bad news for equity valuations? That’s counterintuitive for most listeners. Lucas: It’s counterintuitive until you remember that equities are priced on future cash flows. If labor costs are suppressed, profits might look okay today, but if consumers stop buying because their incomes aren’t rising, those profits evaporate. The market is front-running the consumer collapse. Luna: Interesting. So the labor market is leading the indicator for a downturn, not lagging it. Lucas: In this specific dynamic, yes. Normally, you fire people after sales drop. Here, they kept everyone to preserve institutional knowledge, but stopped paying them more. Now that the savings buffer is gone, households will start pulling back spending. That’s the next leg of this story. Luna: It reminds me of the energy conservation drives during the oil crises. People adapt to lower real income by consuming less. Lucas: A perfect analogy. Except this time, it’s driven by wage stagnation rather than supply shocks. The psychological impact is similar though. Once you realize your paycheck isn’t stretching further, you cut discretionary items. Travel, dining out, electronics. That’s where corporate revenues take the hit. Luna: Do you think the Fed will react by cutting rates sooner to stimulate demand? Lucas: Probably not soon. The Fed hates cutting into a stagnation trap because it risks re-igniting inflation without boosting growth. They prefer to wait for clear signs of deflationary pressure. Until unemployment spikes significantly, they’ll likely hold steady around three point eight eight percent. Luna: So we’re in a holding pattern for both rates and wages. A lot of noise, very little movement. Lucas: For now, yes. But the divergence between GDP growth and wage growth is widening. That gap cannot stay open forever. Eventually, either wages catch up and inflation returns, or wages stay flat and growth collapses. One of those scenarios breaks the current equilibrium. Luna: And until then, investors are trapped between hoping for a rebound and fearing a downturn. Lucas: Exactly. It’s a dangerous place to be. The market is volatile because the fundamental direction is unclear. We’re watching a tug of war between nominal GDP strength and real income weakness. Luna: Before we go deeper into the sector breakdowns, I want to pause here for a moment. Walking through these macroeconomic shifts with us can feel abstract, especially when you’re trying to apply it to your own career or investment decisions. Lucas: Right. And that’s exactly why listener support matters. It allows us to keep digging into these nuances without relying on ads that clutter the signal. If this conversation has helped clarify the landscape for you, consider supporting the show directly. Luna: You can find us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Even a small contribution helps keep this analysis independent and ad-free. Lucas: Thank you for listening. Now, let’s get back to the data. Which sectors are showing the earliest signs of this wage freeze? Luna: Healthcare seems to be holding up best, but technology and finance are clearly cooling. Lucas: Yes. In healthcare, the demand is structural. There’s always a shortage of nurses and technicians, so wages have to rise to attract them. But in tech, the boom has passed. Companies are optimizing headcounts without laying off everyone, hence the 'hoarding' we discussed earlier. They’re freezing salaries to manage burn rates. Luna: So the divergence is sector-specific. Healthcare is inflationary for wages, while tech is deflationary. Lucas: Correct. And this split is confusing the broader indices. When you look at the overall average, it looks flat. But inside, you have two different labor markets operating at different speeds. This makes monetary policy harder because the Fed can’t target one sector without hurting the other. Luna: It’s like trying to steer a ship when half the passengers are pushing forward and half are pushing back. Lucas: A great image. And that’s why the VIX is elevated. Uncertainty about the net direction keeps volatility high. Investors don’t know if the healthcare wage pressure will spill over into the rest of the economy, or if the tech slowdown will drag everything down. Luna: Given that uncertainty, how should individual investors adjust their portfolios right now? Lucas: Defensively. Focus on companies with strong balance sheets and pricing power. If consumers are tightening belts, only brands that can raise prices without losing customers will survive. Avoid highly leveraged firms that rely on cheap debt to fuel growth. Luna: Pricing power becomes the key metric. Can you raise prices when your customers’ incomes are flat? Lucas: Only if you offer essential value. Discretionary luxury is going to suffer first. Essentials, healthcare, and basic utilities will hold up. It’s a shift toward necessity-driven spending. Luna: So the consumer is retreating to basics. That’s a significant behavioral shift. Lucas: It is. And it’s happening quietly. Most people won’t announce they’re cutting back; they’ll just stop buying the upgrade. The data will only show up months later in retail sales figures. For now, we’re left with the ambiguity of the jobs report. Luna: Ambiguity is the enemy of decision-making. It’s frustrating to watch the market react to every small blip. Lucas: It is. But remember, the blips are revealing the cracks. The strong job count is masking the weak wage growth, just as the strong GDP is masking the weak productivity. Layer by layer, the foundation is shifting. Luna: We’ll have to watch the next CPI print closely to see if this trend continues. Lucas: Absolutely. If core PCE starts to dip below one hundred thirty point zero, we might finally see the Fed move. Until then, we’re in the eye of the storm. Luna: Keep your eyes on the wages, Lucas. The jobs are just the distraction. Lucas: Agreed. And that’s the takeaway for today. Don’t trust the headline count. Trust the paycheck. See you tomorrow.