Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the US Labor Market's Hidden Divide
Transcript
- Lucas: So we got the ADP private payrolls number on Wednesday—122,000 jobs added in May, which was stronger than most economists expected. But if you zoom out, there's a really weird bifurcation happening in the labor market that I don't think people are talking enough about. Luna: Bifurcation how? Because the headline unemployment rate is still just 4.3 percent, which by historical standards is pretty tight. Lucas: Right, it's tight on the surface. But look under the hood and you see two very different stories. On one hand, you have sectors like health care and government still adding jobs at a decent clip. On the other, long-term unemployment—people out of work for 27 weeks or more—has been climbing for months. The latest data shows that number is up significantly from a year ago. Luna: And that's the pattern we saw in the 1970s during stagflation, isn't it? Low growth, high inflation, but a rising share of people who just couldn't get back in. Lucas: Exactly. In the 1970s, you had this concept of a 'jobless recovery' where GDP would turn positive but employment lagged for quarters. What's different now is that the overall unemployment rate is low, but the composition is shifting toward people who've been out of work for a long time. Initial jobless claims just hit 225,000, up from 212,000 the week before. That's not a crisis level, but the trajectory is concerning. Luna: And the JOLTS data from April showed 7.6 million job openings, which was actually up from 6.9 million in March. So there are jobs out there. The question is whether the long-term unemployed are a good match for them. Lucas: That's the million-dollar question. The industries that are hiring right now—health care, transportation, warehousing—often require specific certifications or physical stamina. Meanwhile, a lot of the people who lost jobs in retail or hospitality during the pandemic never got back in, and now those sectors are restructuring under inflation pressure. You have companies like Macy's and Walmart closing stores, not opening them. Luna: So you're arguing this is more of a structural mismatch than a cyclical downturn? Because the Fed would love to hear that—it means they can keep rates high without worrying about triggering mass unemployment. Lucas: Partly structural, but also partly about real wages. Average hourly earnings are up to $37.50, which sounds good until you adjust for inflation. With CPI at 332.4 and core PCE at 129.6, real purchasing power is still eroding for most workers. So even people with jobs are feeling squeezed, which feeds into the stagflation narrative—low growth, high prices, and now a labor market that's starting to crack at the edges. Luna: And that squeeze might explain why we're seeing more people drop out of the labor force entirely. The participation rate has been stuck below pre-pandemic levels, and if you're long-term unemployed, the discouragement factor is real. Lucas: Right. The official unemployment rate doesn't count discouraged workers—people who've stopped looking. If you factor them in, the so-called U-6 rate is probably a lot higher. And that's the group that's most vulnerable in a stagflation environment, because inflation eats away at their savings while they search for a job that may not exist in their old field. Luna: So what does this mean for the Fed? They've been watching the labor market for signs of overheating, but this looks more like cooling in certain pockets. Lucas: Yeah, I think the Fed is in a tough spot. The 10-year breakeven inflation rate is sitting around 2.36 percent, which is basically flat, so inflation expectations aren't spiraling. But core CPI is still running hot enough that they can't declare victory. If they cut rates too soon and long-term unemployment keeps rising, they risk a recession. If they hold steady, they risk making the structural mismatch worse by keeping borrowing costs high for small businesses that might otherwise hire. Luna: It's a classic stagflation policy trap. And the geopolitical backdrop doesn't help—tariffs on 60 economies, the Iran situation, all of that adds uncertainty. Lucas: Exactly. So if you're a worker in this economy, the advice I'd give is: if you have a job, try to upskill or get a certification that's in demand, because the safety net is thinner than it looks. And if you're an investor, watch the long-term unemployment data closely—it's a leading indicator for consumer spending, and if that cracks, the market could get ugly. Luna: Speaking of watching data closely, I actually wanted to mention something that's been on my mind. We do this show ad-free, and we try to keep it grounded in real numbers. If you find these conversations useful—if today's episode helped you think about the labor market differently—it would mean a lot if you considered supporting us. Lucas: Yeah, it's a small thing, but it makes a big difference for us. If walking through the economy with us has made something click, you can find the link at buy me a coffee dot com slash fexingo. That's it—no pressure, no premium tiers, just a way to keep this going. Luna: And honestly, if today was worth a coffee to you, that's the link. Really appreciate everyone who chips in. Alright, back to the numbers. Lucas: So where do we go from here? The May jobs report drops tomorrow, and I'll be watching the long-term unemployed share like a hawk. If that number ticks up again, it's going to confirm that the bifurcation is real, not just a one-month blip. Luna: And if it goes the other way—if long-term unemployment starts to decline—then maybe the skills mismatch narrative is overblown. Lucas: Right. But given the JOLTS data showing openings concentrated in low-wage, high-turnover industries, I'm not optimistic. The 1970s analogy isn't perfect, but the idea of a 'two-tier' labor market where some workers do fine while others are permanently sidelined—that feels more relevant than ever. Luna: Well, we'll have the data soon. For now, it's a story of a labor market that looks healthy on the surface but has some real cracks underneath. Lucas: And that's the kind of story that matters most in a stagflation environment—not the headline, but the distribution underneath.