Tears For Capital

Expectations matter, we’re told. And they’re rising when it comes to prices.

According to the April vintage of the New York Fed’s Survey of Consumer Expectations, views on the cost of housing have never been more… well, I’m not sure if the word is “optimistic” or “pessimistic.” I suppose it depends on your vantage point.

Home price change expectations jumped last month to a fresh series high of 5.5%, data out Monday showed. That was up sharply from 4.8% in March (figure below).

Expectations for rent growth logged a fifth straight increase, jumping to their own new series high at 9.5%.

This comes as the financial pages are littered with headlines touting a new housing bubble in the US. And also as the Biden administration rushes to distribute federal rental assistance to tenants who face an uncertain future after a federal judge struck down the CDC’s eviction moratorium.

“Instead of propping up legally-questionable policies, government at every level needs to cut the red tape and focus on distributing the $46 billion in rental assistance efficiently,” Bob Pinnegar, president and CEO of the National Apartment Association, told the AP this week. “Getting rental assistance funds into the hands of those renters and rental housing providers who need it most is the only way to prevent irrevocable harm to our nation’s housing supply.”

But it’s not just housing costs that consumers see rising. More broadly, median year-ahead inflation expectations rose to 3.4% in April from 3.2% in March. That’s highest in nearly eight years (figure below).

Notably, the demographic breakdown showed expectations are rising faster among the “some college” category and, relatedly, among middle-income earners.

Last month, in “The Word Is ‘Inflation.’ With A ‘K’,” I noted that expectations were rising the most among the least educated consumers and those with the lowest incomes. Their views of prices actually abated a bit in April, as inflation concerns appeared to infect the next rung on the ladder (figure below).

Not surprisingly, expectations over the next year remained well-anchored for consumers making more than $100,000 and for those with at least a four-year degree, although over a three-year horizon, the higher income cohort is now essentially in-line with the middle class and lower-income consumers in terms of their overall view on prices.

The inflation narrative was front-page news Monday, as five-year breakevens pushed to 15-year wides, even as commodity prices eventually cooled after copper and iron surged to kick off the new week.

The (potential) problem here is obvious, and some folks are starting to begrudgingly discuss it out in the open, albeit in a needlessly convoluted fashion. This can only be “self-fulfilling” if consumers have the capacity to pay higher prices which, in turn, requires higher wages. If the labor market remains millions of jobs short of pre-pandemic employment levels and employers refuse to pay up for the labor they claim is scarce, the recovery will be in jeopardy.

It’s not just enhanced unemployment benefits and a generous federal government that’s keeping people from returning to work. “It’s undoubtedly a combination of factors creating hiring bottlenecks – childcare and a willingness to venture back out into the in-person economy after more than a year of being advised by the CDC to do the opposite strike us as good places to start,” BMO’s US rates team said Monday. “It strikes us that much of the reopening optimism implies the binding constraint is an open establishment, not the situational agoraphobia created by COVID-19.”

In addition to that, there’s a maddening propensity among employers (and, now, some economists) to talk around reality. If the new reality is defined by more generous government assistance for the unemployed and if prospective workers believe other such assistance (e.g., student loan forgiveness) is forthcoming or else believe better opportunities may be available once the Biden administration’s economic agenda makes it through Congress, then employers will either raise wages enough to entice workers, or they’ll go without them. If they can’t afford to raise wages, and a labor shortage forces them out of business, that’s unfortunate. But it is what it is.

And let’s face it, nearly every publicly traded company that wanted to tap capital markets over the past year has had no problem doing so thanks to the Fed’s backstop for the corporate credit market. Management teams are beating analyst estimates on both the top- and bottom-line at a record pace. And consensus EPS forecasts are rising at the fastest rate on record (figure, below, from SocGen).

Seen in this light, the daily anecdotes about labor shortages now come across as something akin to whining — as though corporations just can’t fathom the notion that America’s meagerly compensated masses aren’t excited about the prospect of returning to soul-destroying occupations for what amounts to pennies.

Finally, no, you can’t “pass along” higher input costs to consumers when consumers aren’t making enough money to buy your products. Eventually, the stimulus checks will be spent and the “excess” savings accumulated over the last year will be gone. If it now costs 40% more to make Pop-Tarts, you can’t just hike the price of Pop-Tarts by 40% overnight without considering whether Pop-Tart lovers can absorb the increase. If they can’t, they’ll switch to a generic brand, or they’ll just skip Pop-Tarts altogether. (Obviously, I’m posing a hypothetical — Pop-Tart prices may be completely stable.)

Ultimately, what I’m hearing is spoiled capital. Capital which can’t understand why labor isn’t rushing back to what may as well be slavery. Capital which is frustrated at the prospect that protecting margins isn’t a straightforward exercise in raising prices. Capital that’s nervous with the way the wind is blowing inside the Beltway. In short: Capital that’s worn out its welcome with the people it exploits.

Cry me a river.