“Immaculate disinflation” has a nice ring to it. Angelic, even.
But how about “American utopia”? If you’re a secularist, that sounds even more appealing.
Last week’s US jobs report (and the cooler-than-expected ECI print for Q4) suggested the US is currently experiencing something that’s “even better than Goldilocks,” Jefferies’ chief economist Aneta Markowska said.
She described a “utopian scenario,” for the world’s largest economy where, if the current conjuncture were to persist, consumers could keep spending, costs could fall for businesses (helping corporates avoid a serious earnings recession) and the cycle could extend in perpetuity.
Suffice to say Markowska doubts that’s likely, but looking back at the last two NFP reports, it appears the textbooks may need to be revised. When taken at “face value [they] suggest that the Phillips curve is not only flattening, it is now inverting!” she exclaimed.
She walked through a few technical reasons why the “underlying” trend in wage growth might be stronger than the figures from the last two months suggest. If correct, and if you assume AHE prints 0.4% when it’s reported alongside February payrolls next month, some of the recent flattening in the Phillips curve could unwind.
But beyond the tedious technical examination, the straightforward fundamentals argue against the notion that wages can slow materially without something else giving way (i.e., without people giving up their jobs).
First, there’s the extraordinarily elevated level of job openings. December’s JOLTS figures were disconcerting for the soft landing crowd, and although Jerome Powell seemed oddly uninterested when interrogated during last week’s press conference, his favorite ratio (of openings to those counted as unemployed) is basically back to 2:1, the highest since the late 1960s.
If you can’t hire enough people, you can’t fire the ones you have. Given that simple reality, “the typical January purge did not fully materialize, which is why seasonally-adjusted payrolls surged by over 500,000,” Markowska went on to say.
Further, demographics and pandemic retirements (with the latter facilitated by the wealth bonanza which accompanied the Fed’s stimulus measures) argue for a much smaller pool of available workers.
The bottom line, Markowska said, is that “there are more than 5 million excess job openings, against roughly one million of potential supply.” That, she remarked, suggests “labor should still enjoy a great deal of pricing power.”
In Jefferies’ view, the Goldilocks narrative — which is not only “alive and kicking,” but in fact beginning to look like a veritable “utopia” — is unlikely to “live past this summer.”
Recall what Deutsche Bank’s Aleksandar Kocic said of the Phillips Curve in 2018:
It inhabits a space different from other macroeconomic frameworks and metrics. In each cycle, it falls apart, but after every annihilation, it re-composes itself and continues to play an important role. It appears “indestructible,” but not in a conventional way, more like a survivor of one’s own death. Phillips curve functions like an organ without a body, an equivalent of Cheshire cat’s smile (in Alice in Wonderland) that persists alone, even when the cat’s body is no longer present
