Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Wage Growth in a Stagflation Economy Isnt What You Think
Transcript
- Lucas: Let’s start with a number that’s getting a lot of attention but not a lot of nuance: average hourly earnings hit $37.40 in April. Up from $37.35 the month before. That’s a 1.6 percent annualized gain in nominal terms. Luna: Which sounds decent until you remember CPI is running at a 3.9 percent annualized rate based on the April print of 332.4. Lucas: Exactly. So real wages are still negative. But here’s the twist — if you break it down by sector, blue-collar wages are actually outpacing inflation in a few key industries. Construction, manufacturing, transportation. Those are up four to five percent year-over-year. Luna: That’s the ai economy rewriting the american dream headline we saw this week. But is that sustainable when GDP growth is only two percent? Lucas: That’s the $31.8 trillion question. Nominal GDP is huge — over 31 trillion — but real growth is barely positive. So you’ve got this weird dynamic where companies are competing for a shrinking pool of available workers, especially in trades, and they’re bidding up wages. But because overall demand isn’t roaring, they can’t pass all those costs through to prices without losing customers. Luna: Hence the profit squeeze everyone’s worried about. But also a reason why services inflation might stay sticky — labor is the biggest input cost in most services. Lucas: Right. And look at JOLTS — job openings fell again in March to 6.866 million. That’s down from 6.922 million. So the labor market is cooling, but it’s still historically tight. The quits rate is holding around 2.1 percent, which is low, meaning people are nervous about switching jobs. They’re staying put and asking for raises rather than hopping for a bigger bump. Luna: That’s a shift from 2021-2022. Back then, job-hoppers got fifteen percent raises. Now incumbents are getting three to five percent if they’re lucky. Lucas: And the bond market is watching all this. The ten-year breakeven inflation rate dropped to 2.39 percent — that’s down from 2.44 a week ago. So bond traders are actually pricing in slightly less inflation over the long run, even as the monthly CPI prints stay elevated. Luna: Which brings us to the bond vigilantes. Ed Yardeni said Monday the Fed will have to hike in July to appease them. And with Kevin Warsh being sworn in as Fed chair this Friday, the market is pricing in a hawkish tilt. Lucas: If Warsh signals a rate hike in July, that puts the labor market in a weird spot. Higher rates cool demand, which slows hiring, which could reverse the blue-collar wage gains we’re seeing. But if he doesn’t hike, the ten-year yield could spike, tightening financial conditions anyway. Luna: So workers are caught between a rock and a hard place. Either their nominal raises get eaten by higher interest costs, or they get eaten by inflation. Lucas: And there’s another angle that doesn’t get discussed enough: productivity. Real GDP per worker has been flat for two quarters. If wages rise without productivity gains, unit labor costs go up, which feeds into core services inflation. That’s the classic stagflation recipe — rising costs, slow growth, and persistent inflation. Luna: We should say that this show is listener-supported and ad-free by design. If today’s conversation was useful and you want to keep it that way, buy me a coffee dot com slash fexingo helps. A few dollars a month goes a long way. Lucas: Yeah, it really does. And speaking of useful data — let’s look at what’s happening with the quits rate by industry. In construction, it’s actually ticked up slightly, which suggests workers there feel confident enough to leave for better offers. In retail and hospitality, it’s dropping. Luna: That matches the anecdotal reports from the regional Fed surveys. The service sector is still complaining about labor quality, but they’re not seeing the same churn anymore. Lucas: So the composition of wage growth matters more than the headline number. If you’re a construction worker in Texas, your real wage might be up one or two percent. If you’re a software engineer in San Francisco, your base salary might be flat, but your RSUs have taken a hit because tech stocks are choppy. Luna: That’s the inequality story within stagflation. Blue-collar workers are catching up a bit, white-collar workers are treading water, and the very top — executives, financiers — are still doing fine because asset prices are high. Lucas: The S&P 500 at 7,446, the Dow at 50,286, NASDAQ at 26,293 — all up over the past five days. The equity market is basically ignoring the stagflation narrative. But gold selling off, silver flat, gold miners down 1.6 percent — that suggests the market thinks the Fed will eventually get inflation under control, possibly by triggering a recession. Luna: Or that stagflation is already priced in, and the next move is a hard landing, which would be deflationary. Lucas: Right. If you look at the yield curve — it’s still inverted, but less so than a year ago. The two-year versus ten-year spread is around negative 30 basis points. That’s still a recession signal, but it’s been flashing for two years now without a recession actually arriving. Luna: Economists call that a soft landing. But with inflation still above three percent and growth at two percent, it’s more like a bumpy landing. Lucas: And that brings us back to wages. If the Fed does hike in July, the unemployment rate — currently 4.3 percent — could tick up to 4.5 or 4.6 by year-end. That would start to reverse the wage gains in cyclical sectors. Luna: But initial jobless claims are still low — 209,000 last week. That’s not signaling layoffs yet. Lucas: No, but claims are a lagging indicator. The leading indicators — like temporary help employment, hours worked, small business hiring plans — are all softening. The NFIB survey showed the lowest share of firms planning to increase compensation since 2021. Luna: So the wage growth peak might be behind us, even if the CPI peak isn’t. Lucas: That’s the worrying scenario — wages slow, but inflation stays elevated because of shelter costs and services. That’s pure stagflation. Real incomes decline, consumption slows, and the economy tips into recession without inflation coming down first. Luna: That’s essentially the 1970s playbook, except back then unions had more power and oil shocks were the primary driver. Today it’s services inflation and a tight labor market. Lucas: And fiscal policy is different. The deficit is still huge — north of six percent of GDP. So the Treasury is borrowing a lot even as the Fed might tighten. That puts upward pressure on long-term rates, which is what the bond vigilantes are protesting. Luna: One more data point: the 10-year breakeven at 2.39 percent. That means the bond market expects average inflation of 2.39 percent over the next decade. That’s above the Fed’s two percent target, but not dramatically. So they’re not pricing in a 1970s repeat. Lucas: No, but if you look at five-year breakevens, they’re higher — around 2.6 percent. So the market expects inflation to be stickier in the near term and then fade. That’s the softish landing scenario, but it relies on wage growth moderating without the labor market cracking. Luna: And that’s the balancing act for the next Fed chair. Warsh inherits an economy where the consumer is still spending — retail sales are okay — but the savings rate is down to 3.2 percent. People are running down pandemic buffers. Lucas: So the key number to watch isn’t the CPI headline or even the payrolls number. It’s average hourly earnings in the leisure and hospitality sector. That’s the canary. If those start decelerating, it means the low-end labor market is cooling, which would eventually bring down services inflation. If they stay hot, the Fed has a problem. Luna: And what about the Putin-Xi gas pipeline news? Energy prices have been volatile with the Iran situation. That could reignite headline inflation and complicate the wage picture. Lucas: Absolutely. Oil is a wildcard. If energy spikes, real wages get squeezed even more, and the Fed would have to decide whether to look through it or hike anyway. That’s the kind of decision that defines a Fed chair’s legacy. Luna: So for workers listening: your nominal raise might feel good, but if it’s less than four percent, you’re likely losing purchasing power. And if you’re in a cyclical industry, that raise might not last. Lucas: And if you’re an investor, the wage data tells you whether the Fed stays on hold or pivots to hikes. That’s the single biggest driver of asset prices right now. So keep an eye on that $37.40 number. It’s small, but it carries a lot of weight.