Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Real Wage Stagnation Behind The Jobs Report
Transcript
- Lucas: Look at the headline number for September. The unemployment rate ticked up slightly to four point two percent, which feels minor, but it’s part of a much larger pattern we’ve been tracking all quarter. The real story isn't just about who has a job, but what that job actually pays you after you account for the cost of living. Luna: Right, because nominal wages might be ticking up, but if your grocery bill and rent are rising faster, you are effectively poorer than you were six months ago. Lucas: Exactly. And when you look at the latest Core CPI reading from early August, it sits at three hundred thirty seven point eight. That number has barely budged from where it was last year, which means the inflation that matters most to households—services like healthcare, housing, and insurance—is completely sticky. It is not coming down fast enough to match wage growth. Luna: So even though the labor market looks tight with nonfarm payrolls still adding jobs, the purchasing power is eroding. Are we seeing this in the actual dollar amounts people take home? Lucas: We are. Let's talk about average hourly earnings for private sector workers. In September, they came in at thirty seven dollars. That sounds decent until you realize that the price of services has risen at a similar pace. The gap between what workers earn and what they spend is narrowing rapidly. We are entering a zone where nominal gains are being fully consumed by real costs. Luna: That sounds like a classic stagflation trap. Growth slows, but prices stay high because the supply side of services can't expand quickly enough. Lucas: Precisely. And there is another signal here that everyone is missing. Look at the JOLTS data for August. Job openings dropped to seven thousand seventy nine thousand. That is a significant decline from the previous month. The labor market is cooling, but it is doing so quietly. There are no mass layoffs yet, which is why the unemployment rate hasn't spiked. Luna: It’s the slow bleed rather than a sudden crash. So companies are hiring less aggressively, which puts downward pressure on wages, but they aren't firing people en masse. Lucas: That is exactly right. And this creates a dangerous dynamic for the consumer. When job openings fall, workers lose bargaining power. They stop demanding raises as easily. But the prices they face for essential services don't drop just because the labor market cools. So you get a scenario where income growth stalls while expenses remain elevated. Luna: I think that explains why retail sales feel weak even though employment data looks okay. People are cutting back because they don't feel secure, and their money doesn't go as far. Lucas: It does. And look at the broader macro picture. Real GDP growth annualized is sitting at two point two percent. That is solid, but it is down from twenty five percent earlier in the year. The economy is slowing, and the drag on consumer spending is becoming more apparent. We are seeing the early stages of a demand-side contraction. Luna: But the supply side constraints in services are still there. You can't build a hospital or train nurses overnight. So those prices stay rigid. Lucas: Right. And that rigidity is what keeps the Federal Reserve in a bind. If they cut rates too early, they risk re-igniting inflation in those sticky service sectors. But if they wait too long, the cooling labor market turns into something worse. The job opening decline is a warning shot. Luna: It feels like we are walking a tightrope. One misstep and the 'soft landing' narrative collapses under the weight of stagnant real wages. Lucas: Well said. And consider the debt angle. Americans are already flashing warning signs on household debt levels, comparable to the Great Recession era. When real wages stagnate, debt servicing becomes harder. You start seeing defaults rise, which further restricts credit availability. Luna: So the combination of high costs, lower job mobility, and existing debt burdens is creating a perfect storm for consumption. What happens when the energy shock hits next winter? Lucas: That is the wildcard. If energy prices spike, it feeds directly into transportation and heating costs, which are embedded in the CPI basket. Given that core CPI is already sticky, an energy shock would make the Fed's job nearly impossible. They would have to choose between fighting inflation or saving the labor market. Luna: And they would likely choose inflation, leaving the labor market to cool further. Which brings us back to the worker. The individual is bearing the brunt of this policy dilemma. Lucas: Absolutely. And that is why I think the focus needs to shift from headline inflation to real wage growth. If you are making more dollars but buying less stuff, the economy is failing you. The two point two percent GDP growth looks good on paper, but it doesn't fill your bank account. Luna: It’s a distributional issue as much as a macroeconomic one. The benefits of growth are evaporating before they reach the household budget. Lucas: Exactly. Now, before we dig deeper into the specific sectors driving this wage stagnation, I want to pause for a moment. If walking through the economy with us has made something click, the way these stay ad-free is listener support. You can buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps keep the research sharp and the conversations honest without the noise of ads. Lucas: Thanks for considering it. Now, let's look at the health care sector specifically, since it is a major component of those sticky services costs. Luna: Health care is such a weird beast because it is largely insulated from competition. Prices are set by insurers and providers, not by market forces. Lucas: That is true. And with an aging population, the demand for health services is only going to increase. This structural demand push keeps prices high regardless of what the Federal Reserve does. It is a secular trend, not a cyclical one. Luna: So unless there is some massive regulatory change or technological breakthrough that lowers costs, that inflation will persist. It’s baked into the demographic reality. Lucas: Baked in. And this affects every household differently depending on their age and health status. For younger workers, it might seem abstract, but for those with families or aging parents, it is a direct hit to disposable income. Luna: It reminds me of the concept of 'consumption smoothing.' When incomes are volatile or stagnant, people try to maintain their standard of living by borrowing. But we saw that debt limits are being tested. Lucas: Yes. And once the borrowing stops, consumption drops sharply. We are seeing the precursors to that now. Credit card delinquencies are ticking up. It is a lagging indicator, but it confirms the stress test on household balance sheets. Luna: So the cooling labor market is the precursor to a consumption collapse. It’s not immediate, but the trajectory is clear. Lucas: It is. And this makes the current monetary policy stance incredibly fragile. Any unexpected shock could tip the balance from stagnation into recession. The buffer is thinner than it appears. Luna: Which means investors need to be very careful about assuming a soft landing. The underlying data suggests a harder impact ahead. Lucas: Agreed. We need to watch the job openings data closely. If that continues to fall below seven thousand, we will likely see wage growth decelerate significantly. Luna: And that deceleration will feed back into lower corporate profits, which will then affect stock valuations. It’s a full circle effect. Lucas: It is. And that is why I am focusing on the real wage metric today. It captures the essence of the problem better than any single inflation number. Luna: Because it tells you whether the typical worker is actually getting ahead or just running on a treadmill. Lucas: Exactly. Running on a treadmill. That is the best way to describe the current state of the American economy. Lots of movement, little forward progress. Luna: A vivid image. And one that resonates with anyone trying to plan for the future right now. Lucas: It does. So as we move into the rest of the quarter, keep an eye on that core CPI number. If it stays above three hundred thirty seven, expect the Fed to hold steady and the labor market to cool further. Luna: And expect consumers to tighten their belts even more. The ripple effects are already visible in the data. Lucas: Right. It is a subtle shift, but a profound one. We are moving from a phase of recovery to a phase of consolidation. Luna: Consolidation sounds polite. I’d call it a correction of the excesses we saw during the pandemic boom. Lucas: Maybe so. But corrections hurt. And the pain is being felt most acutely by those who were left behind during the initial surge. Luna: True. It highlights the inequality that often gets masked by aggregate numbers like GDP. Lucas: Definitely. Aggregate numbers lie if you don't look at the distribution. And the distribution is shifting against the median worker. Luna: Which makes this episode crucial timing. Understanding where the pressure points are helps you navigate your own financial decisions. Lucas: Absolutely. Whether you are investing, saving, or planning a career move, knowing that real wages are the key metric changes everything. Luna: It shifts the focus from gross income to net purchasing power. A fundamental distinction. Lucas: It is. And I think that is the takeaway for today. Don't just look at the paycheck. Look at what it buys. Luna: A simple reminder, but one that carries a lot of weight in this economic environment. Lucas: Indeed. As we head into November, I wonder if the holiday spending season will reflect this caution. Or if consumers will finally snap out of it. Luna: My bet is on caution. The data doesn't suggest a sudden burst of confidence. It suggests a slow, deliberate pullback. Lucas: Fair point. We will have to watch the retail data closely. But for now, the message is clear: the grind continues, and the margins are tighter than ever. Luna: Tighter margins. That seems to be the theme across the board, from corporate profits to household budgets. Lucas: It is. And navigating that requires a clear head and accurate data. Thanks for tuning in. Luna: Stay curious, and keep watching those real wage numbers.