Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Low Fire Rate Paradox Explained
Transcript
- Lucas: Look at the initial jobless claims data released last Thursday. It dropped to one hundred ninety four thousand, which is near the lowest level we have seen since the nineteen sixties. That sounds like a healthy labor market on the surface, but when you pair that with the unemployment rate ticking up to four point two percent in September, you get a picture of an economy that is refusing to let go. Luna: Right, so you are seeing people staying employed even as the broader hiring momentum slows down? That is the classic definition of labor hoarding, but it feels different this time because the job openings are actually dropping. Lucas: Exactly. The JOLTS data shows job openings falling from seven thousand three hundred thirty five thousand down to seven thousand seventy nine thousand in August. Companies are not firing, but they are also not hiring. They are just sitting on their existing workforce while trying to manage costs. It creates this weird lag effect where the labor market looks tight on retention but loose on expansion. Luna: And that retention behavior is directly feeding into wage growth, isn't it? Because if you don't replace expensive employees, your average payroll stays high. Lucas: It does. Average hourly earnings for private sector workers went up to thirty seven point eight dollars in September. That is a small tick, but it reflects the fact that companies are paying premium wages to keep people who could easily find other jobs. They are paying for stability, not just productivity. Luna: So the Fed has to decide whether this wage stickiness is going to keep core inflation above target, especially with the core PCE price index still rising to one hundred thirty point five. Lucas: That is the central tension right now. The Fed funds rate is hovering around three point seven five percent, and they have been cautious about moving too fast. But if labor costs remain elevated because firms are hoarding workers, the disinflation process stalls. We are seeing real GDP growth slow to two point two percent, yet prices are still creeping up. Luna: It feels like the traditional models aren't capturing the full friction here. Usually, you see layoffs spike before wages cool off, but we are seeing the opposite. Lucas: That is because the fear of losing skilled talent is outweighing the desire to cut costs. In sectors like technology and professional services, replacing someone takes months and carries a huge risk of knowledge loss. So companies pay the premium. It is a rational business decision that creates macroeconomic rigidity. Luna: But isn't that unsustainable if demand keeps cooling? Eventually, the revenue stream dries up and the payroll bill becomes a burden. Lucas: Eventually, yes. But that transition hasn't happened yet. The ten year Treasury yield is sitting at four point nine nine percent, which suggests investors are pricing in a steady, if slightly sticky, economic environment. There is no panic in the bond market because the labor market isn't collapsing; it is just stuck. Luna: Stuck in a way that makes it hard for the Fed to declare victory on inflation without triggering a sudden surge in unemployment. Lucas: Precisely. If the Fed pushes rates too high too quickly, they force the hand of these hoarding firms. Once the cost of capital exceeds the value of retaining those extra workers, the fire rate spikes all at once. That is the risk we are navigating right now. Luna: I think that risk is underestimated by the markets. Everyone is focused on the top-line GDP number, but the composition of that growth is shifting toward maintenance rather than expansion. Lucas: Maintenance growth is a polite term for stagnation with a smile. It keeps the lights on, but it doesn't create new opportunities. And that is why the consumer is feeling the pinch even though they are still employed. Prices are sticky because costs are sticky. Luna: Speaking of costs, do you think this labor dynamic is contributing to the recent jump in UK inflation to three point five percent? It seems like a global trend of rigid labor markets. Lucas: It is definitely a parallel. The UK is facing similar pressures with cement and construction costs rising, which ties back to labor shortages in specific trades. But the US situation is unique because our jobless claims are so historically low. We are operating at a level of employment efficiency that is rare. Luna: So the US is essentially running a hot engine that refuses to cool down, even as the driver eases off the gas. Lucas: That is a very accurate analogy. The momentum is built into the payroll structure. And with the S&P five hundred down nearly one percent over the last week, equity markets are starting to price in the idea that this momentum might not be enough to sustain earnings growth. Luna: It’s a delicate balance. The firms want to hold onto workers, but shareholders want margins. When those two goals conflict, someone usually loses. Lucas: Usually the worker, in the form of layoffs. But that hasn't happened yet. And until it does, the inflation narrative remains complicated. We are not seeing deflationary forces taking over; we are seeing inertial forces. Luna: Inertia is dangerous for policymakers because it feels safe until it isn't. A sudden shift from hoarding to cutting can happen very fast. Lucas: Agreed. Which brings us to the current quarter's performance. With the Nasdaq down one point eight percent and the Russell two thousand up one point seven percent, there is a divergence in how different sectors are handling this labor environment. Small caps are more resilient, perhaps because they are less burdened by legacy headcounts. Luna: Small caps often have leaner structures, so they can adapt faster. Large caps are carrying the weight of those hoarded workers. Lucas: Exactly. And that structural difference is important for anyone looking at portfolio allocation right now. You are betting on agility versus scale. Luna: If walking through the economy with us has made something click, remember that we deliberately run this show without ads. If you want to support that choice and help us keep digging into these deeper macro trends, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: Yeah, your support keeps the research deep and the commentary sharp. Thanks for listening, and let's get back to the data. Luna: Let's talk about housing, then. The headlines are flashing warning signs just as the Fed weighs more rate hikes. How does the low fire rate interact with the housing market? Lucas: It creates a supply-side bottleneck. People stay in their homes because they are employed and have mortgages they can service. They are not moving, which keeps inventory low. Meanwhile, new construction is slowing because builders are hesitant to take on debt at these rate levels. Luna: So you have low turnover plus low new supply, which drives prices up regardless of income growth. That is another source of sticky inflation. Lucas: Shelter costs make up a huge chunk of the CPI. If housing prices or rents keep rising because of this labor-driven immobility, the Fed's job becomes infinitely harder. They are fighting a battle on two fronts: wages and shelter. Luna: And with the core CPI still climbing, that second front is proving very difficult to secure. Are you seeing any sectors where the fire rate is actually increasing? Lucas: We are seeing some softness in hospitality and leisure, but even there, it is modest. The overall picture is one of remarkable resilience in employment, which is both good news for workers and bad news for inflation control. Luna: It’s a paradox. Strong employment data should be good, but it delays the necessary correction that would lower prices. Lucas: Exactly. We are trapped in a period of adjustment that feels comfortable until you look at the long-term trajectory. The nominal GDP is growing at thirty two trillion dollars, but the real growth is slowing. That gap is where the inflation lives. Luna: So the question for the rest of the year is whether the labor market can soften gradually without breaking. Or will it snap? Lucas: Most models suggest a gradual softening, but human behavior is rarely linear. If a major employer decides to cut headcount, the domino effect can start quickly. Until then, we watch the jobless claims and the average hourly earnings like hawks. Luna: One final thought on the tech sector. With the Nasdaq down, are tech companies finally joining the layoff wave, or are they still hoarding? Lucas: They are still largely holding, but the pace of new hiring has slowed dramatically. They are optimizing, not expanding. It is a subtle shift, but it is visible in the JOLTS data for information services. Luna: Optimization is just a nice word for doing more with less. It sounds like the era of easy growth is pausing, not ending. Lucas: Pausing is the right word. We are in a consolidation phase. The fundamentals are intact, but the margins are tightening. And that is the reality for investors and consumers alike heading into the end of the year. Luna: A consolidation phase that feels a lot like waiting for the other shoe to drop. Let's see if the next jobs report gives us a clearer signal. Lucas: It will. Until then, the low fire rate keeps the story interesting, if not entirely comforting. Stay tuned for the next update.