Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Jolting the Job Market
Transcript
- Lucas: So, Luna, you've probably seen the headline: unemployment rate ticked down to 4.1 percent in July, while the economy is growing at barely 1.5 percent annualized. That's a weird combination. Luna: It is weird. Normally, when growth slows that much, you expect unemployment to rise. But here we are with a tight labor market. Lucas: Exactly. And the JOLTS report from June shows job openings fell to 7.36 million, down from 7.54 million the month before. That's the lowest since 2021. So on the surface, the labor market is cooling, but not collapsing. Luna: So what's going on? Are businesses just not hiring, or are they holding on to the workers they have? Lucas: That's the key question. And the data suggests it's more about hoarding. Layoffs are still historically low, initial jobless claims are at 203,000, down from 207,000. But openings are shrinking. So companies are pulling back on new hires while keeping their existing staff. Luna: So it's like they're battening down the hatches, but they don't want to lose the crew they've got. Lucas: Right. And that's a distinctly different dynamic from the 1970s stagflation. Back then, you had high inflation, slow growth, but also much higher unemployment, which peaked around 9 percent in 1975. Today, we've got the inflation and slow growth, but the labor market is really, really tight. Luna: Why the difference? Is it just that the economy is more services-oriented now, or is there something else? Lucas: Part of it is demographics. The workforce is aging, and we've had years of underinvestment in training. So when companies finally find good workers, they don't want to let them go. That's a big shift from the 70s, when there was more slack. Luna: So the labor market is actually a bright spot in an otherwise gloomy picture. But that has implications for inflation, right? Lucas: It does. Because if employers are holding onto workers, they're less likely to cut wages, and they're more likely to pass on costs in the form of higher prices. That could keep core inflation sticky. Core CPI is still at 336.8, up from 336.06, so it's not coming down fast. Luna: Hmm. So the labor market resilience might be the thing that prevents the Fed from cutting rates as quickly as some hope. Lucas: Exactly. And that's the tricky part. The Fed is walking a tightrope. They want to cool inflation, but they don't want to break the labor market. And so far, the labor market is holding up better than the GDP numbers would suggest. Luna: I've been reading that a lot of economists are talking about 'job churn' versus 'job creation.' Can you unpack that a bit? Lucas: Sure. Job churn is the flow of workers between jobs, quits and hires. Job creation is net new positions. Right now, we're seeing a slowdown in both, but the quits rate is actually still above pre-pandemic levels, though it's been declining. So people are still switching jobs, but not as many new jobs are being created. Luna: So it's a bit of a mixed bag. Some dynamism, but less overall expansion. Lucas: And that's actually consistent with what you'd expect in a stagflationary environment where businesses are uncertain. They're not confident enough to hire aggressively, but they're not so pessimistic that they're laying people off. Luna: That kind of reminds me of a conversation we had a while back about wage growth not turning into a spiral. Wages are still growing, but modestly, right? Lucas: Right. Average hourly earnings are up to $37.60, but the year-over-year growth is around 3 percent, which is below the inflation rate. So real wages are actually falling. That's a classic stagflation feature. Luna: So workers are feeling the pinch, even though they're employed. That's tough. Lucas: It is. And it's one reason why the 'vibecession' narrative persists, even though the unemployment rate is low. People look at their paycheck and see that it doesn't go as far as it used to. Luna: So, given all this, what should the Fed be watching? Is it the quits rate, the openings rate, or something else? Lucas: I think the quits rate is actually a better indicator of worker confidence. When people are quitting, it means they're finding better opportunities. That rate has been declining, which suggests some cooling. But it's still above where it was before the pandemic, so there's still some churn. Luna: And that churn, in turn, contributes to wage pressures, because companies have to offer higher wages to attract new hires. Lucas: Exactly. So it's a balancing act. If the Fed sees quits falling further, that might give them more comfort to ease. But right now, the data is still too hot for them to pivot. Luna: Before we keep going, I want to pick up on something you said earlier about real wages falling. That's a tough spot for workers. And it reminds me that our show is able to keep going because of a small group of listeners who chip in monthly at buy me a coffee dot com slash fexingo. It's what keeps us ad-free and lets us dig into these numbers without any corporate agenda. Lucas: Yeah, it's a small thing that adds up. We're grateful for the folks who do that. It genuinely helps us keep producing these deep dives, like today's look at the labor market. Luna: And if that's something you're inclined to do, we appreciate you. Now, back to the numbers. So we have this paradox: job openings are falling, but unemployment is low. That suggests there's a mismatch between what employers are looking for and what workers are offering. Lucas: Absolutely. The skills gap is real. We have high demand for tech and healthcare workers, but a lot of the unemployed are in other sectors. That mismatch is why you can have both low unemployment and falling openings. Luna: And that mismatch, in turn, could be a structural factor that keeps inflation elevated, because employers have to pay more for scarce skills. Lucas: Right. And that's why the 1970s comparison is imperfect. The 70s had more workers available, so wage pressure was less of a factor. Today, the labor market is structurally tighter, which makes the stagflation scenario more stubborn. Luna: So what's the takeaway for our listeners? If you're a worker, what does this mean for your job security and your bargaining power? Lucas: I'd say job security is still pretty good, because employers are reluctant to lay off. But bargaining power is limited, because there aren't as many new openings. So you might not get a big raise, but you're unlikely to lose your job. Luna: That's a stable but stagnant situation. Sounds a lot like the economy as a whole. Lucas: Exactly. Stagnation with a silver lining of stability. But the big question is: how long can this persist? If growth stays at 1.5 percent and inflation stays above 3 percent, something has to give. Luna: And that's the thing that keeps me up at night. But for now, the labor market is the one bright spot, even if it's a bit dim. Lucas: Yeah. And it's going to be the key thing to watch when the Fed meets next. If the labor market starts to crack, they'll have an excuse to cut rates. But if it holds up, they'll have to keep fighting inflation. Luna: So the next few months are going to be really telling. We'll be watching the JOLTS numbers and the monthly payrolls closely. Lucas: For sure. And that's what we'll be digging into in future episodes. Thanks for listening.