‘That Thud You Heard’

“That thud you heard last Friday was the jaw of every forecaster hitting the floor,” Christopher Waller said Thursday, during remarks for a webcast at The Global Interdependence Center’s 39th Annual Monetary and Trade Conference.

He was referring to the April jobs report, which missed the lowest estimate by more than 400,000.

“It was a big surprise for me and most people, but it probably shouldn’t have been, because it fits with what we’ve been hearing from businesses about labor supply shortages,” he added.

Waller’s remarks were overtly dovish, but his speech is worth a read. It came across as considerably more forthright (not to mention colorful) that what you’d get from some of his colleagues.

“Prices for lumber and other inputs for housing are skyrocketing,” he said. Waller noted that producers will likely be “reluctant” to give up the pricing power that comes with shortages, and said “wage increases for new workers may cause firms to raise wages for existing workers in order to keep them.” The implication, he went on to concede, is that “there may be knock-on effects from the current wage increases.”

Apropos, McDonald’s is set to raise hourly pay to more than $13 per hour at company-owned locations. Entry-level pay will be between $11 to $17. Managers will start between $15 and $20. “The restaurant industry is among several that have been forced to reconsider how much they pay workers who’ve been reluctant to resume low-wage and potentially high-risk jobs during a health crisis,” Bloomberg wrote, on the way to quoting a memo from Joe Erlinger, president of McDonald’s USA, who said,

We face a challenging hiring environment, and staying ahead means we must constantly renew our commitment to offer one of the leading employment packages in the industry. Simply put: putting our people first and doing the right thing for them will drive continued growth for our business.

What’s that I hear? An epiphany?

Probably not, but it’s a step in the right direction. Nobody is “proud” to work the register at McDonald’s. But if you’re getting paid a living wage, it certainly makes things more tolerable, even if “dignified” isn’t an adjective anyone would use to describe the situation.

Sadly, the commentary around these types of stories still has an ominous tone. For example, the same linked Bloomberg piece noted that “the concern among some economists is that wage and price increases could feed off each other and create an inflationary spiral.”

Anyone putting fries in a McDonald’s bag for a living is thinking: “Gee, it must be nice to be so out of touch with reality that you think the extra $2 I’m set to get is going to push the country towards an inflationary spiral.” In reality, the hourly raise might not even bridge a rent shortfall. Especially not the way things are going right now.

Who knows, maybe I’m whistling past the graveyard. Maybe the writing is on the wall and hyperinflation is just around the corner. After all, consumer prices did just rise nearly 1% in a month. Thursday’s PPI print wasn’t exactly comforting either. And let’s face it, I’m not someone who would notice a 5% rise in the grocery bill, so maybe it’s me who’s out of touch.

Still, I doubt the narrative that says giving people who make pennies a few more pennies is likely to start tipping dominoes.

Waller addressed this on Thursday and, again, his tenor was a welcome reprieve from the usual boilerplate party-line parroting. Don’t get me wrong, he parroted the party line. But his squawking was eminently more colloquial.

“That thud you heard yesterday was forecasters’ bodies following their jaws to the floor after the CPI report was released,” he said, adding that,

It was a surprise, but a look at its causes doesn’t alter my fundamental outlook, which is that the main pressures on inflation are temporary. Stimulus checks put money in people’s pockets, and when they spend it, there will be upward pressure on prices. But when the checks are gone, the upward pressure on prices will ease. As households draw down savings, demand for goods and services will increase, which again will put upward pressure on prices. But, just like stimulus checks, once the excess savings is gone, it’s gone, and any price pressures from this factor will ease. One strength of a capitalist system is that markets adjust. If demand and prices rise for a product, supply will follow, and bottlenecks will dissipate. So once again, price pressures induced by bottlenecks should reverse as supply chains catch up and orders get filled.

The obvious question is: If all of this is just common sense and thereby wholly predictable, then why were “jaws” and “bodies” hitting the floor with a double “thud” (as Waller put) last Friday and again on Wednesday?

This is why people don’t trust economists. They have very plausible explanations for a variety of phenomena, but as Rabobank’s Michael Every wrote Thursday, the problem is that their predictions and forecasts are woefully off the mark when it matters. Even if they get the direction right, they get the magnitude wrong.

Of course, that’s hardly their “fault.” The problem isn’t economists, the problem is economics. It’s a soft science masquerading as a hard science.

Economics isn’t totally unique in that regard. If you’ve spent any time doing post-graduate work in other soft sciences you know practitioners all want to pretend their field of study is amenable to quantification and codification. Political “science” is no different. I imagine the same is true with sociology, although I have no experience there.

We run into trouble with economics because we attempt to apply it as though it were a hard science and in the process, we make policy judgments and take decisions that affect people’s lives and livelihoods in a very direct way.

I’m the last person to suggest we should just “leave it alone” and let the “free hand” figure it all out for us. And yet, decades upon decades of fine-tuning and tinkering have left us with negative interest rates and most advanced economies running some version of an absurd Ponzi scheme wherein one government entity (the central bank) buys debt issued by another government entity (the Treasury) with just one degree of separation.

I’m only comforted by my intuition that a world run solely by the purportedly infallible “free hand” would be a much worse place than a world run by academics who think they’re scientists.

During the same Thursday event, Waller said that if he “were to see 4% inflation month in, month out,” he “would get very concerned.”