Keeping Up With The Waltons

More pressure on the Fed to hike rates.

That was the consensus takeaway from the December jobs report.

A second consecutive woeful headline miss came packaged with the lowest unemployment rate of the pandemic era and a super-hot read on wage growth.

Average hourly earnings for nonsupervisory workers in leisure and hospitality notched a near 16% YoY gain (figure below), underscoring intense competition for workers in the hardest-hit sector of the world’s largest economy.

The figure (above) illustrates the point. Although job openings in the sector fell in November and hires ticked up, the situation remains a funhouse mirror.

“Despite having an economy that at the end of Q3 2021 was 1.4% larger than it was pre-pandemic, there are still 3.6 million fewer people on company payrolls,” ING’s James Knightley said Friday. He flagged the latest JOLTS data, out earlier this week, in noting that America “has a labor supply problem.”

It sure does. A record 4.5 million people quit a job in November. I’ve talked about this at length, most recently in “The Cost Of Procrastination: America’s Broken Economy,” in which I jokingly chided the manager of a nearby grocery store for adopting a harsh tone with a new employee:

Don’t do it, Bill! Don’t irritate the kid on his first week. Not in 2021. It’s too risky. Walmart is probably paying $40 an hour by now. He’ll be folding Dickies and stocking Great Value cheese for the Waltons by noon tomorrow.

I was kidding, but that’s no joke. A piece published by Bloomberg on Friday provided a real-world example. At a hospital in Nebraska, the president and CEO is in direct competition for workers with the local Walmart where, John Tozzi flatly noted, “wages are rising.” The same hospital executive suggested he’s also competing for labor with a local “hose manufacturer.” The title of the article: “US Hospitals Struggle to Match Walmart Pay as Staff Flees Omicron.”

That suggests the situation is becoming wholly untenable. “Despite higher pay on offer there is scant evidence of former workers returning to the labor force,” ING’s Knightley went on to say. “Consequently companies are having to recruit from competitors… creat[ing] broader pay pressure as companies seek to retain staff they currently have by paying them more.”

Still, some argue a wage-price spiral isn’t imminent. In a January 4 note, Goldman delivered a fairly trenchant take on wage growth expectations among businesses and workers. As part of their analysis, the bank collected “all business surveys with both current and expected wage growth indices, scale[d] each series to [a] historical wage tracker, and [took] the difference between the implied future and current wage growth to estimate the implied acceleration or deceleration over the next 3-6 months.” Ultimately, the results were mixed. On net, the exercise suggested 4% wage growth for the first half of 2022 (figure on the left, below).

The bank also consulted a bevy of compensation surveys, which together suggested labor costs will increase less than 4% this year (figure on the right, above). Goldman noted that because “most of the surveys measure growth in the total labor bill as opposed to growth in hourly wages, [the] estimates are likely an upper bound on the anticipated growth in hourly wages.”

Still, it’s hard to avoid the feeling that the economy is teetering precariously on the brink of the dreaded “spiral.” The implications for small businesses from such a scenario are dire. In the “broken economy” article (linked above), I wrote that,

[E]mployers will likely find it impossible to lower wages or reduce benefits once the labor market does normalize. That could doom countless small businesses, especially considering their lack of bargaining power when it comes to what they pay for the goods they sell.

On Thursday, the NFIB said the percentage of small business owners who identified labor costs as their top problem rose to a 48-year record high last month.

Relatedly, the net percent who reported raising compensation (48%) and the net percent planning to do so (32%) were also record highs (figure below).

“The labor shortage is holding back the small business economy as owners work to retain their current employees and attract employees for their open positions,” NFIB Chief Economist Bill Dunkelberg sighed.

I assume this goes without saying, but small businesses can’t compete with corporate behemoths for workers in perpetuity. That’s like bidding against a Saudi prince at an auction for Renaissance paintings.

Eventually, something has to give. As ING’s Knightley remarked, in the same Friday note cited above, “the US is largely a service sector economy and employment costs are typically the largest cost.”

If you’re wondering how one or two (or three or even four) Fed hikes is going to fix this situation, you’re not alone.