Chris Kuehl
Managing Director • Armada
If you have been turning to the dismal scientists for guidance regarding the rest of 2023 and into 2024 you are likely a little frustrated and confused. One set of talking heads asserts that the world is on the precipice of total economic breakdown and the other set is urging calm as they issue reassuring predictions of a short and mild downturn. Not very helpful for those running a business. I wish I could say I have all the right answers but I am looking at loads of contradictory data as well. Why? What is making this period so much harder to categorize? It seems to come down to two factors – the labor market and consumer behavior and their subsequent impact on inflation behavior.
Nothing has been quite as out of sync as the labor market. There have been rate hikes and a myriad of other attempts to slow the economy and yet hiring remains strong month after month, the rate of joblessness stays low and wage rates keep rising (faster than inflation). This kind of labor related stress usually occurs when the economy is booming, not when it is facing threats of recession. It is a problem that has been building for decades but little or nothing has been done to address it. There are too few workers in general due to retirement of the Boomer generation as well as factors such as the emergence of the gig economy and all the incentives to stay off payrolls in general. The expectation every month is that job growth will stall and it doesn’t. The hike in the unemployment rate was simply a matter of people in the U-6 category moving to U-3 (in February it was at 7.3% and is now at 6.4%). The U-6 measure counts the “discouraged worker” and these are the people that reenter the labor force when conditions improve.
Consumer behavior has also been unpredictable. Usually there is a reduction in retail activity when there are threats on the horizon. People who are afraid of losing their jobs become more frugal. There are signs that consumers are changing their patterns in reaction to inflation but spending is still more robust than would be expected. Much of the rationale for this is that workers still have their jobs and many have been getting raises that have allowed them to maintain a chosen lifestyle. As long as people are willing to spend there will be price hikes.
These two factors have impacted the potential speed of an inflation slowdown. The Fed’s preferred measure of inflation is the Personal Consumption Expenditure index and it reached a peak last December. The expectation was that it would keep falling but it has just stabilized at about 4.6%. This means that all the efforts from the Fed have not managed to budge the numbers. There are calls for the Fed to hike the rates again but the bigger question is whether this will make any difference given the other factors. Thus far labor is not reacting to the rates and neither is consumer behavior.
