Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Silent Crisis of Zero Firing Rates
Transcript
- Lucas: Look at the latest initial jobless claims data from mid-October. It hit one hundred ninety-four thousand. That is near the lowest level since the nineteen sixties. On the surface, that sounds like a perfectly healthy economy where everyone has a job and nobody is getting fired. Luna: Right, but isn't that actually a sign of something stuck? If people aren't leaving or being let go, where is the natural churn? Lucas: Exactly. We are seeing a phenomenon economists call zero firing rates. Companies are hoarding talent not because they need it all right now, but because they are terrified of having to replace it later. It creates a false sense of security in the labor market while suppressing productivity. Luna: So you are saying the low claims number is hiding the fact that businesses are just sitting on their hands with excess staff? Lucas: Precisely. And here is the kicker. The unemployment rate just ticked up to four point two percent last month. But nonfarm payrolls barely moved, adding only twenty-nine thousand jobs in September after huge numbers earlier in the year. The system is freezing up. Luna: That feels counterintuitive. If the unemployment rate is rising, shouldn't we see more layoffs and higher claims? Lucas: Usually, yes. But when firing rates drop to near zero, new hires slow down drastically. The unemployment rate rises not because people are losing jobs, but because no one is entering the workforce or switching jobs fast enough to absorb new entrants. It is a liquidity trap for human capital. Luna: Appreciate that support, Lucas. It lets us take the time to look at these deeper structural shifts instead of just skimming the headlines. Lucas: Thanks to everyone who contributes. Now, back to the data. Let's talk about why this matters for inflation. If wages are sticky upward because companies can't fire people, but productivity is flat, you get cost-push inflation without any real value creation. Luna: I have seen the average hourly earnings data too. Private sector wages went up to thirty-seven dollars and eighty cents in September. That is still climbing, even as growth slows. Lucas: And that is the problem. When you combine rising wages with stagnant output, your unit labor costs explode. Core CPI was up to three hundred thirty-eight point nine last month. The Fed wants inflation down to two percent, but this labor rigidity makes that target incredibly hard to reach. Luna: So the Fed is stuck. They can't cut rates because wages are still growing, but they can't hike them much further without breaking an economy that is already struggling with low firing. Lucas: Spot on. The Fed Funds effective rate is holding around three point seven five percent. But the real issue is the ten-year Treasury yield. It dropped to four point nine nine percent last week. Markets are pricing in a slowdown, but the labor data isn't confirming a recession yet. Luna: It feels like we are in a weird limbo state. Not quite a boom, not quite a bust. Just... stuck. Lucas: That limbo is expensive. Look at the S&P 500. It closed at seven thousand seven hundred twenty-three, down slightly over the last five days. Investors are worried that corporate profits will compress because companies are paying high wages for work that isn't generating proportional revenue. Luna: Do you think this zero-firing trend is unique to the post-pandemic era, or is it becoming a permanent feature of modern business? Lucas: I think it is accelerating. With AI and automation looming, managers are afraid to lay off workers now because retraining or replacing them later will be even more expensive. It is a strategic holdover. They are keeping headcount as insurance against future uncertainty. Luna: But doesn't that hurt innovation? If you aren't bringing in fresh blood or letting underperformers go, doesn't the culture just calcify? Lucas: Absolutely. This is the productivity paradox. We know productivity needs to grow to sustain wage increases. But right now, Real GDP growth has slowed to two point two percent annualized. We are spending more on labor to produce less relative growth. It is inefficient by design. Luna: So for the average worker listening, does this mean job security is actually higher, but career growth is lower? Lucas: That is a very sharp way to put it. Yes, you might not get fired. But you also won't find it easy to jump to a competitor for a significant raise. The external market for talent is frozen, so internal leverage drops for everyone except the top tier. Luna: That sounds frustrating for anyone in the middle of a company. You are stuck in place while the world moves around you. Lucas: It is. And this brings us back to the broader macro picture. The World Bank recently noted that availability of capital is not really an issue, but borrowing costs are driving up due to AI demand. So we have cheap money available for some things, but expensive for general business expansion. Luna: Right, because the risk premium is so high. Companies don't want to expand if they can't even manage their existing workforce efficiently. Lucas: Exactly. And look at the JOLTS data. Job openings fell to seven thousand seventy-nine thousand in August. That is a clear signal that demand for labor is cooling, even if firing isn't picking up yet. Luna: So we have falling openings, stable employment, and rising unemployment. What is the trigger that finally breaks this zero-firing lock? Lucas: Usually, it is a shock to cash flow. A sustained period where revenue doesn't cover those sticky wage costs. Or a regulatory change that forces restructuring. Right now, the buffer is large enough that most companies are absorbing the pain rather than cutting. Luna: But buffers don't last forever. At some point, the margin erosion becomes unacceptable for shareholders. Lucas: True. And when that happens, the pent-up firing could come all at once. It wouldn't be a gradual adjustment; it would be a wave. That is the tail risk here. The market assumes gradualism, but labor markets often adjust in jumps. Luna: That is a scary thought. So the current calm is basically the eye of the storm? Lucas: In many ways, yes. Especially with interest rates potentially staying higher for longer. The Fed survey says rate hikes might be coming, which would tighten financial conditions further and squeeze those margins we talked about. Luna: I wonder if this explains why consumer confidence is so fragile. People feel safe in their jobs, but they don't see opportunities elsewhere, so they stop spending. Lucas: It definitely contributes. Nominal GDP is thirty-two trillion five hundred sixty-three billion, but real growth is slowing. If consumers stop moving money around, the velocity of money drops. That is bad for inflation targeting. Luna: So the Fed is fighting a battle on two fronts: controlling price inflation while managing a labor market that refuses to clear itself. Lucas: You nailed it. It is a structural mismatch. The tools they have—interest rates—are blunt instruments for a surgical problem like labor hoarding. Luna: Do you think businesses will eventually adapt, or is this going to define the next decade of economic cycles? Lucas: I think we are seeing the beginning of a new normal. Where stability is prioritized over efficiency. It changes how companies value talent, how investors assess risk, and how policymakers gauge health. Luna: It seems like we need a completely different set of metrics to evaluate the economy if firing rates stay this low. Lucas: Agreed. Unemployment rate alone is lying to us. We need to watch firing rates, vacancy ratios, and productivity per hour simultaneously to get the real picture. Luna: What do you expect to happen in the next quarter if this trend continues without a major shock? Lucas: Expect continued frustration from the Fed. Inflation stays sticky above two percent, wages stay elevated, and growth hovers around two percent. A boring, sluggish equilibrium that keeps markets volatile. Luna: Boring is expensive, apparently. Thanks for breaking this down, Lucas. It definitely changes how I look at those weekly jobless claims numbers. Lucas: Always happy to dig into the noise, Luna. Next week, we might look at how this impacts specific sectors like tech versus manufacturing. Stay tuned.