No Unified Theory Of Everything

The “transitory” debate will heat up in the new week. Not that it’s gone cold lately.

An update on US consumer prices will likely show inflation ran at a 5% annual pace for a fourth month in August (figure below), testing the resolve of those inclined to stick to the script that says price pressures will prove ephemeral — eventually.

Of course, there’s something wholly contradictory about the notion of a phenomenon “eventually” proving itself ephemeral. If something sticks around long enough for the word “eventually” to be applicable, the phenomenon wasn’t really ephemeral. Ephemeral things go away quickly, not eventually.

Producer prices rose more than expected last month and anecdotes from PMIs uniformly suggest price pressures haven’t abated to any appreciable degree.

August’s disappointing jobs report was accompanied by brisk wage growth. For some, that’s cause for concern on the inflation front. “A larger-than-forecast jump in wage growth in August has sharpened the focus on the burning question of whether inflationary pressures will prove transitory,” Bloomberg wrote.

Recall that although leisure and hospitality hiring flatlined, wages surged. The figure (below), probably counts as a “chart crime,” but it captures two key dynamics: Waning labor market momentum where it matters most and rising wages associated with labor scarcity.

The record disparity between vacancies and hires points to severe labor market friction. Although some believe the expiration of emergency unemployment benefits will help alleviate what many businesses describe as an acute labor shortage, it’s unlikely to be that simple.

“While there might be low skill/wage opportunities available, the subset hardest hit by the pandemic is now reluctant to reengage in the workforce,” BMO’s Ian Lyngen and Ben Jeffery said. “The combination of the coronavirus and enhanced employment benefits arguably account for the lion’s share of this dynamic, but the true question is which of these two factors is the most powerful,” they added, noting that “with enhanced benefits now expired, the coming months will test the hypothesis that the additional cashflow was a larger deterrent to seeking employment than the risk of COVID.”

And that’s to say nothing of the notion that some (many?) leisure and hospitality workers used the last year to reflect on their circumstances and at some point resolved themselves against the servile conditions that define the US services sector.

Prior to the pandemic, I argued that occupations in which tips comprise a large percentage of worker pay are sometimes preferable to other kinds of demeaning work for a variety of reasons, not least of which is the fact that cash tips often go unreported and thus untaxed. Now, though, the game may have changed. For example, Walmart is paying an average hourly wage of $16.40. I’m sure there are all manner of caveats, but consider that starting pay at Target and Amazon is now $15 an hour. Walmart also pays 100% of college tuition and book costs for its associates. While those numbers won’t siphon workers from high-end restaurants and likely won’t have any impact on the supply of bartenders, it’s far from clear why anyone would work at, say, a Waffle House instead of Walmart. In fact, I’m not sure why anyone would prefer Starbucks over Walmart (or Target) given the comparatively low level of stress.

Speaking of retail, the new week brings a fresh read on the US consumer, whose outlook deteriorated markedly last month according to the University of Michigan’s survey and the Conference Board’s gauge. Retail sales probably declined 0.8% last month, economists reckon (figure below). July’s retail sales numbers were far worse than anticipated. It wouldn’t be terribly surprising to see another disappointing report.

“Ongoing consumer price inflation and flagging retail sales are the consensus at this stage, which reiterates the underlying risk that elevated prices will soon be functioning as a tax on consumption as opposed to reflecting an economy that has the potential to run too hot,” BMO’s Lyngen and Jeffery said, in the same noted cited above.

Later in the week, after learning how much more punitive that tax on consumption was in August and also whether it affected spending decisions, we’ll get the preliminary read on Michigan sentiment for September. Suffice to say there’s not much to suggest that consumers’ mood should have improved.

Still, it’s never a great idea to bet against the US consumer, whose penchant for spending is the stuff of (dubious) legend. Lack of income and/or buying power has never stopped Americans from spending and besides, incomes are still elevated.

“With the fiscal impulse to households fading as we roll off supplemental unemployment insurance benefits and rebate checks, we expect the earned income child tax credits and labor market progress to support continued income growth,” Morgan Stanley’s Ellen Zentner said. “The spread between income and spending has remained extremely stable, suggesting that consumption is far from being constrained by lack of income.”

You can write your own script. It’s mostly impossible to craft anything like a coherent narrative (let alone some “unified theory of everything”) given the unprecedented nature of the circumstances.

As far as Beltway bickering and bellicose brinksmanship go, there’s little utility in fretting over the debt ceiling, even as Democrats’ efforts to push Joe Biden’s economic agenda through Congress complicate things and create extra friction.

I have no idea why this needs to be reiterated every, single time this farce plays out, but just in case anyone needs the reminder: The US can’t involuntarily default. That’s impossible. Literally. The only default that’s possible is a voluntary one. As such, the question isn’t about the country’s finances, it’s about the country’s elected officials, their demonstrable ineptitude and, more recently, their sanity.

If members of Congress are willing to countenance an overt, explicit attempt on the part of a sitting president to overturn an election loss by way of vice presidential decree, then nothing is entirely out of bounds. Throw in the fact that many members of Congress don’t seem to know what a Treasury bond is (recall Lindsey Graham’s ludicrous contention that the US could somehow selectively “cancel” — in a vacuum — US debt owned by China, for example) and there’s cause for concern. Ultimately, though, they’ll figure it out.

But make no mistake, the legislative agenda is front and center. And it’ll get above-the-fold coverage for at least the next three weeks. “With the Democrat reconciliation resolution not including a debt ceiling provision, there’s little alternative but to raise the ceiling in a bipartisan fashion,” TD’s Gennadiy Goldberg and Priya Misra remarked. “This suggests that negotiations are likely to go down to the wire as Congress is debating two fiscal packages and returns only next week.”