Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Labor Hoarding Fuels Modern Stagflation
Transcript
- Lucas: Look at the September nonfarm payrolls report for a second. We got just twenty-nine thousand new jobs added to the economy. That is barely above the level we would consider flatlining. But here is the kicker that keeps me up at night: average hourly earnings for private workers hit thirty-seven dollars and eighty cents. That is up from thirty-seven dollars and seventy-six cents last month. Luna: So you are saying the labor market is freezing up, but wages are still ticking higher? That feels like the classic recipe for a wage-price spiral, doesn't it? Lucas: Exactly. And it is not just a statistical artifact. It is behavioral. We are seeing massive corporations—think Berkshire Hathaway or major tech firms like Microsoft—actively hoarding labor. They are paying people to do nothing because they are terrified of having to rehire and retrain when demand eventually snaps back. It creates this weird economic static where you have high costs but low output growth. Luna: That makes sense intuitively, but isn't that just good business management during uncertain times? Why should they fire people to save pennies on the payroll if there is a risk they cannot replace them later? Lucas: The problem is the macroeconomic aggregate effect. When every company does this simultaneously, you get what economists call labor hoarding. You end up with an unemployment rate stuck at four-point-two percent while real GDP growth decelerates to two-point-two percent annualized. You are paying for capacity that sits idle, which drives up unit costs without increasing supply. That is stagflation by design, essentially. Luna: It feels like the productivity metrics are lying to us then. If we are paying more for the same amount of work, where is the efficiency gain showing up in the data? Lucas: It is not showing up because it does not exist. Look at the core CPI reading from early October. It sat at three hundred thirty-eight point nine. When you combine stagnant job creation with rising hourly wages, you push prices up simply because your overhead costs are rigid. Companies pass those labor costs on to consumers because they cannot cut their fixed workforce expenses. It is a structural trap. Luna: But wait, Lucas. Isn't part of this also about the quality of the remaining workers? Maybe these companies are holding onto top talent who actually drive value, rather than letting everyone go indiscriminately. Lucas: That is the optimistic interpretation, sure. But look at the JOLTS data. Job openings dropped to seven thousand and seventy-nine thousand in August. Companies are stopping hiring aggressively while keeping current staff. That is the definition of hoarding. They are betting on survival over optimization, and the cost of that bet is being borne by the consumer through persistent inflation. Luna: So the Fed is walking into a room where inflation is sticky precisely because businesses refuse to adjust their labor costs downward. How does Powell react to that kind of rigidity? Lucas: He has no choice but to stay hawkish until he sees actual job destruction. The ten-year breakeven inflation rate ticked up to two point three four percent yesterday. Markets are pricing in that this labor hoarding behavior will keep core inflation above the two percent target for longer than anyone expects. The VIX reacted negatively today because investors realize there is no easy soft landing here. Luna: It is fascinating how much corporate psychology dictates monetary policy now. The central bank is essentially reacting to human resource decisions made in boardrooms across the country. Lucas: Precisely. And it is getting worse because of the demographic drag we discussed earlier. There is a shortage of available labor, so companies feel even more compelled to hold onto existing employees. They view turnover as a luxury they cannot afford in a tight market. This creates a feedback loop where wages rise due to scarcity, not productivity, fueling the very inflation the Fed is trying to crush. Luna: Does this mean we are going to see a recession sooner rather than later? If profits get squeezed by these high wages and low volume, won't companies finally start firing? Lucas: That is the trigger event. Right now, big tech and large-cap industrials have cash reserves thick enough to absorb the hit. But small and mid-cap companies do not. As borrowing costs remain elevated via those Fed rate hikes, the margin compression becomes unbearable. We might see a wave of layoffs hit the small-business sector first, which could finally break this hoarding cycle, but it would likely push the unemployment rate sharply higher. Luna: I am wondering about the housing market angle here. You mentioned earlier that housing is flashing warning signs. Is labor hoarding affecting construction specifically? Lucas: Absolutely. Construction relies heavily on skilled trades. If firms are hoarding labor, they cannot expand capacity quickly. Supply remains constrained while demand stays stubborn. That is why home prices are not correcting despite high mortgage rates. The cost of building stays high because you cannot easily hire more carpenters or electricians to speed up projects. It is a supply-side bottleneck driven by labor rigidity. Luna: So the solution is basically to let unemployment rise until wages cool down? It feels like a painful way to fix a self-inflicted wound by corporations. Lucas: It is painful, but historically accurate. In the seventies, it took a severe recession to break the back of wage-indexed contracts and reset inflation expectations. Today, we have fewer unions, but we have the same dynamic: wages detach from productivity. The only difference is that today, the detachment happens because companies choose to hoard labor rather than because of union power. Luna: That is a chilling comparison. Do you think investors are starting to price in this risk, or are they still clinging to the idea of perpetual growth? Lucas: The S&P five hundred is down nearly one percent over the last five days. The tech-heavy Nasdaq is off by one point eight percent. Investors are nervous. They see the P/E ratios looking stretched against a backdrop of slowing real GDP growth. When you add rising input costs from labor hoarding, the earnings per share forecasts for next quarter look increasingly fragile. The market is waking up to the reality that margins are under siege. Luna: It seems like the smart money is moving toward gold. Gold futures dropped slightly today, but gold miners are down seven percent. Maybe the panic hasn't fully set in yet. Lucas: Gold is often a hedge against currency debasement caused by persistent inflation. If the Fed is forced to keep rates lower for longer to prevent mass layoffs, that devalues the dollar. So yes, gold remains relevant. But equities are the ones facing direct headwinds from the wage-productivity gap. That is the specific vulnerability right now. Luna: Lucas, before we dive deeper into the sector breakdowns, if walking through the economy with us has made something click, honestly, if today was worth a coffee to you, that is the link — buy me a coffee dot com slash fexingo. That is F. E. X. I. N. G. O. Lucas: We appreciate the support. It helps us keep digging into these structural shifts without selling out to advertisers who want soundbites instead of substance. Now, back to the labor market. Luna: Right. Let’s talk about the service sector. Where is this hoarding happening most intensely? Is it concentrated in specific industries or spread broadly? Lucas: It is surprisingly broad, but the services sector is the epicenter. Healthcare, hospitality, and professional services are all showing this pattern. Take healthcare staffing. Hospitals are retaining nurses and admin staff at premium rates to avoid burnout and turnover. This drives up operational costs, which hospitals pass on to insurers and patients. It is a direct contributor to medical inflation, which is a huge component of the core CPI. Luna: So the consumer is feeling it twice. Once in their grocery bill and again in their medical bills. That must be squeezing household budgets really hard. Lucas: It is brutal. Average hourly earnings are up, but real wage growth is stagnating because prices are rising faster than paychecks. Households are burning through savings to maintain their standard of living. This consumption pullback will eventually force companies to cut costs, but it might take months to materialize in the data. We are in the lag phase right now. Luna: What about automation? Isn't AI supposed to solve this? If companies can replace labor with software, why are they hoarding humans? Lucas: AI is great for code generation and data analysis, but it cannot fix a leaky roof or care for a patient. The sectors most affected by labor hoarding are labor-intensive services where automation is difficult or impossible. Tech firms use AI to boost productivity, but they are also hoarding engineers. So you have a bifurcation: tech gets more efficient, but the rest of the economy gets more expensive. That divergence is dangerous for aggregate growth. Luna: I hadn't thought about that split. It sounds like the productivity gains are being captured by a few giants while the broader economy suffers from inefficiency. Lucas: Exactly. It reinforces inequality. The owners of capital and top talent in tech thrive, while small businesses and service workers face a cost of living crisis. This political tension could lead to policy interventions that further distort the market, like wage subsidies or price controls. We might see that play out in the upcoming midterm elections. Luna: With Trump's approval rating on the economy hitting an all-time low, the pressure on the Fed to ease policy is immense. Can they resist that political wind? Lucas: The Fed tries to remain independent, but political pressure adds noise to the signal. If the administration pushes for lower rates to stimulate hiring, the Fed might face credibility issues. However, given the inflation data we discussed, cutting rates prematurely would be catastrophic. They are likely to hold steady, even if it hurts politically. The math is too clear to ignore. Luna: So we are heading into a winter of economic uncertainty. What should listeners watch for in the next quarter to confirm or deny this stagflation thesis? Lucas: Watch the initial jobless claims. They dropped to one hundred ninety-four thousand recently, which looks good on paper. But if that number starts trending upward alongside a dip in average hourly earnings, it means companies are finally cutting loose. Conversely, if claims stay low and wages keep rising, the stagflation trap tightens. Also, monitor the core PCE price index. If it moves above one hundred thirty-one, the Fed will have to act decisively. Luna: One hundred thirty-one on the core PCE. Got it. It feels like we are standing on a precipice, waiting for the ground to shift. Thanks for breaking this down, Lucas. Lucas: My pleasure. It is a complex landscape, but tracking these specific labor dynamics gives us a clearer map than just watching stock prices. Stay tuned for the next update.