The global recovery is “red-hot,” Morgan Stanley declared, in the course of reminding market participants how right they were last year, when the bank (loudly) championed the “V-shaped” narrative and predicted the return of inflation.
“12 months on, deep skepticism has given way to broad agreement,” the bank’s Chetan Ahya said.
I suppose that’s true, but there’s nothing in the way of agreement when it comes to whether the “red-hot” nature of the recovery is a good thing or a bad thing. Forced to venture a guess without conducting a formal survey, I’d say a majority are now in the Larry Summers camp — that is, concerned about an overheat.
Of course, Summers elicits eye rolls even from those who currently agree with him. He’s openly arrogant, has been wrong before and his position on the current recovery seems to contradict positions he adopted previously.
Apropos, one question for Morgan Stanley is whether policymakers will repeat mistakes made a decade previous, leading to secular stagnation. Their answer, for now anyway, is “no,” and that’s thanks to the effect the pandemic had on reshaping the way policymakers think about their goals.
In short: The pandemic laid bare myriad social inequities which, while already glaring, became wholly untenable last year, especially when the spark of racial injustice was introduced to an already combustible situation that found large swaths of the US workforce displaced and staring down economic oblivion.
“As the declining share of wages in GDP and rising income inequality came to the fore, an inclusive growth environment emerged as a goal of both monetary and fiscal policy,” Ahya wrote over the weekend. “The bias will be to err on the side of keeping policies expansionary.”
That’s one rationale for keeping the faith when it comes to the recovery. Like ING, Morgan sees the US economy coming out the pandemic on a better growth trajectory than if the crisis hadn’t occurred.
“If low growth and lowflation characterized the macro environment post-2010, this is emerging as an environment of high growth and higher inflation, diminishing the risk of secular stagnation,” Ahya said, adding that “in the US, this translates to a growth environment where GDP will be 3pp above its pre-COVID-19 path by end-2022.”
As for risks, it’s the same story. There are the virus variants, yes, but for Morgan, “the biggest threat” is that core inflation (PCE) in the US overshoots what Ahya described as the Fed’s “implicit” threshold of 2.5%.
Although he echoed the Fed in saying transitory factors and base effects “should be ignored,” he pseudo-fretted about the interplay between higher wages and prices. I say “pseudo” because this is always a delicate discussion. You don’t want to suggest that higher wages for everyday people are bad, but you do want to acknowledge the inherent risks.
Morgan expects wage cost pressures to “intensify” as the US labor market improves. Almost three-quarters of job losses are in low-wage sectors, nearly twice the level witnessed in 2008-2009, the bank observed.
A new Bloomberg Businessweek piece detailed the lengths restaurants and bars are going to in order to attract employees. “The [pandemic] has transformed few areas of the US economy more than food service,” the piece read, noting that “it’s hard to overstate the importance of what in 2019 was an $860 billion-a-year industry.” At some point in their lives, almost two-thirds of Americans have worked in a restaurant.
The industry is still more than 1.6 million jobs short of pre-COVID levels of employment (figure above) and, as the same linked article lamented, “It’s unlikely the 10.6 million-person workforce will ever return to pre-pandemic strength.”
It’s not just more generous unemployment benefits keeping workers away. Some in the industry are finding that wages are better at Amazon fulfillment centers, for example. Others, particularly those working at chain restaurants, have decided retail jobs are preferable to the stress of, say, the Burger King register, when you consider that both occupations pay the same (minimum) wage. You don’t get tips for punching in Whopper orders.
“The impact on wage costs from intense pressures on labor demand will be compounded by the labor supply side,” Morgan’s Ahya went on to say. “The pandemic has accelerated the economic restructuring process.”
Bloomberg cited one-time bonuses handed out by Olive Garden as well as wage hikes at Chipotle. Last week, McDonald’s said it’s raising wages at company-owned locations.
And yet, as one industry consultant (and former restaurateur) put it while commenting for the linked Bloomberg piece, many workers in the industry have had it. “This is the first time that they’re actually saying, ‘You know what? Screw you guys, we’re not coming back’,” he said.
Behold: Labor rising.
Read more: Greed Is Good. Just Not If You’re A Worker