The Labor Force Participation Rate is rebounding a bit from the depths of the pandemic, but it’s still far below the highs achieved around the turn of the millennium. If there is one chart that exemplifies the rise and fall of a civilization, it is this:

 

 

That isn’t hyperbole. A recent op-ed in The Wall Street Journal by Mene Ukueberuwa talked about the sheer number of workers exiting the labor force, along with the economic and social consequences. The immediate economic implication is a worker shortage. There are more job openings than applicants, which has increased wages for those who choose to work. One in eight men are no longer working, nor looking for work.

There has been much discussion of the Great Resignation, the phenomenon where workers quit their jobs in favor of retirement or doing nothing. This social phenomenon is very difficult to pin down. On one end, high-wage workers have left the labor force because of the stresses of working during the pandemic, with round-the-clock Zoom calls and isolation. On the other end, low-wage workers have quit their jobs, mostly in service businesses, because they find the work undignified and the conditions medieval. For a time, they could make ends meet with stimulus checks and child tax credits, but those have run out. No one is really sure what they are doing for subsistence in the meantime.

If you’re president, you want a lot of people working because more people working means more output and higher economic growth. That’s one reason. But another reason you want people working is so they have things to do—idleness poses political problems. People who are not working (especially men) can become disaffected and angry, and make trouble in a variety of ways. And idleness tends to beget idleness, as people lose whatever skills they have left. Then you have generations of people not working.

Our attitudes toward work have changed in the last 20 years, perhaps significantly. In 2000, when the labor force participation rate peaked, people were putting in very long hours—and loving it. The book Monkey Business, by John Rolfe and Peter Troob, talked about bankers putting in 120-hour weeks. But even outside of banking and tech, people were working very hard.

We’ve seen a shift in priorities away from work and ambition toward something called work-life balance, with increased parental leave, time off, and other amenities. Even people who are not strictly unemployed are perhaps underemployed, working fewer hours than they used to.

Work is good for the spirit. There are few things more rewarding or satisfying than putting in a hard day’s work, accomplishing one or more things, and going home tired but happy. Idleness is a form of spiritual sickness—sleeping in until 10 a.m., fooling around on social media, playing video games, maybe taking some drugs, and accomplishing nothing. The decline in the labor force participation rate is happening for a variety of economic reasons—automation, the Great Resignation. But part of it is our shifting cultural attitudes toward work. Work is something to be avoided at all costs.

The labor force participation rate in Argentina dropped to 38.4% in 2020, during the pandemic. Now it stands at 46.7%. A labor force participation rate below 50% means that less than half the country is working—and supporting the other half that is not. It enlarges the welfare state and creates generations of institutionalized dependency that is difficult to reverse. Generations of Peronism has destroyed the culture of work that once existed in Argentina. The country’s problems aren’t simply economic, a matter of a rapidly depreciating currency and high inflation. They’re also deeply rooted in cultural norms around work.

According to Ukueberuwa, “Thirty years ago, America’s prime-age work rate was nearly 10 percentage points above Europe’s. Now Europe’s is a couple of points higher than America’s.” That’s a big loss in competitiveness. We used to make fun of Europeans for being lazy. Now, they have surpassed the United States in terms of work ethic. And the downward trend is intact.

 

US Economy

 

  • Employment costs rose again last quarter, although the increase was a bit lower than expected. On a year-over-year basis, the increase was the highest in two decades.
  • US labor costs have diverged from other advanced economies.

 

 

  • Companies see labor costs/shortages as the most important issue.
  • A 125 bps total rate increase this year (five 25 bps hikes) is now almost a certainty, according to the fed funds futures market.
  • The Core PCE inflation measure (the Fed’s preferred indicator) is approaching 6%.

 

 

  • But easing supply strains suggest that we are near the peak for consumer inflation
  • By the way, trucker waiting times outside of LA ports have eased.
  • The updated U. Michigan consumer confidence indicator hit the lowest level in a decade this month (due to inflation concerns).

 

 

  • Economists have been downgrading the current quarter’s growth forecasts as omicron takes a toll.
  • The Chicago PMI index was stronger than expected, pointing to robust business activity in the Midwest region.
  • On the other hand, the Dallas Fed’s factory index hit the lowest level since mid-2020.
  • However, the region’s factories are gearing up for rapid-fire hiring in the months ahead.
  • Manufacturers’ backlogs remain massive, suggesting that factories will keep busy in the months ahead.
  • Growth in new orders continues to slow.

 

 

  • Hiring keeps improving.
  • Some leading indicators suggest that we will see further moderation in US manufacturing growth.
  • US vehicle sales rose sharply in January, suggesting that dealer inventories are improving.
  • All industries are struggling with labor shortages.
  • The January ADP report was ugly, showing a loss of 300k private-sector payrolls. What happened? At least 20 million Americans were infected with omicron in January. Many couldn’t come to work, with some not getting paid – which reduced the number of people counted as employed.
  • Here is a look at inflation spikes across historical events.

 

 

  • Gasoline prices are nearing multi-year highs again, which is pressuring consumer sentiment.
  • The rise in corporate profits suggests input costs pressures are being passed through to consumers.
  • Wholesale used car prices climbed again last month, but the increase was much smaller this time.

 

 

The Fed

 

As the Federal Reserve moves toward tighter policy, Yale scholar and former Morgan Stanley Asia chair Stephen Roach says it is far behind the curve and may have to slam on the brakes to regain control. This could mean higher market volatility than most presently expect.

  • The Fed recognizes inflation is a widespread and persistent problem, reinforced by wage pressure as labor supply remains tight.
  • With inflation at 7% and the nominal Federal Funds rate effectively zero, real overnight interest rates are at a record low -7%.
  • The only other times real Fed Funds went below -5% were in 1975 and 1980, bookending the “Great Inflation” period.
  • On the Fed’s current trajectory, real rates will likely have stayed well below zero for at least three years.
  • Escaping from this without igniting a crisis will be the riskiest policy bet the Fed has ever made.

Roach thinks bringing inflation under control will require the Fed to tighten far more than the “dot plots” presently suggest. If so, financial markets will face a rude awakening.

With the Bank of England raising rates and the European Central Bank snapping out of its dovish mode, traders are betting that the Fed will be aggressive in fighting inflation. The market is now pricing one-in-four odds of a 50 bps rate hike in March rather than 25 bps.

I believe Fed officials are largely responsible for the cycles of bubbles, booms, and busts over the last 30 years. 

I’ve talked before about how the Fed has painted itself into a corner. All the options are bad and getting worse.

As you know, there are interest rates and “real” interest rates (nominal interest rates minus the inflation rate), which account for the fact the currency with which a borrower repays may have changed value before repayment was due. The Fed is now taking this to extremes, as former Morgan Stanley Asia chair Stephen Roach explained in a recent Project Syndicate piece. Quoting (emphasis mine):

“Consider the math: The inflation rate as measured by the Consumer Price Index reached 7% in December 2021. With the nominal federal funds rate effectively at zero, that translates into a real funds rate (the preferred metric for assessing the efficacy of monetary policy) of -7%.

“That is a record low.”

“Only twice before in modern history, in early 1975 and again in mid-1980, did the Fed allow the real funds rate to plunge to -5%. Those two instances bookended the Great Inflation, when, over a five-year-plus period, the CPI rose at an 8.6% average annual rate.”

“The forward-looking Fed still faces a critical tactical question: What federal funds rate should it target to address the most likely inflation rate 12–18 months from now?”

“No one has a clue, including the Fed and the financial markets.”

 

Market Data

 

  • Volatility is at the highest level since April of 2020.
  • Stifel expects a significant market correction due to tighter financial conditions.

 

 

  • The Nasdaq Composite is headed for its worst month since October 2008 and the worst first month of the year of all time.
  • The largest equity ETF which tracks the S&P 500 saw substantial outflows last month.

 

 

  • Fewer companies are beating margin estimates.

 

 

  • Margins have declined in most sectors.

 

 

  • This commodity rally has been impressive.

 

 

  • Goldman expects returns across major asset classes to be lower this year and beyond.

 

 

  • Meta’s weak results created a catalyst of a sharp selloff in US tech on Thursday.

 

 

Thought of the week

 

“Adversity doesn’t build character, it reveals it”

 

Pictures of the Week

 

 

 

 

All content is the opinion of Brian J. Decker