Perhaps there has never been a more bittersweet economy for business.
Thanks to trillions in government stimulus, the economy grew at the fastest pace in more than 80 years, leading to record-breaking gains across the board resulting from early pandemic lockdowns. Companies saw corporate profits increase by a total of 22.6 percent in 2021.
But this stimulus also made the labor market incredibly tight, and wage power was firmly in the hands of workers. Wages have continued to rise in tandem with inflation, threatening a wage-price spiral in which workers have to be paid more to raise prices.
Now everything comes to a head.
Corporate profits fell 1.1 percent in the third quarter of this year, compared to a 4.6 percent gain in the second quarter.
This is largely due to ongoing and ongoing wage growth. Wages rose 0.6 percent – double estimates – while average 12-month hourly earnings rose 5.1 percent, well above the 4.6 percent forecast.
And companies keep hiring. Workforce rose by 263,000 in November, well above the Dow Jones estimate of 200,000 for the month as businesses continue to catch up on the pandemic. In fact, Michigan manufacturing jobs are almost back to pre-pandemic levels.
The US Federal Reserve is doing the corporate sector a disservice by continuing to raise interest rates to curb inflation. The Fed hoped more slack would come to the job market as workers, now more comfortable with exposure to COVID-19 and incentives drying up, would return to the workforce.
But that just doesn’t happen.
The labor force participation rate of 62.1 percent in November is barely above what we achieved at the beginning of the year. Nationally, the rate remains 1.3 percentage points below pre-pandemic levels, meaning around 3.4 million people remain unemployed.
Michigan’s workforce is short of more than 100,000 workers, with a labor force participation rate of just 60 percent, the lowest since the Great Recession more than a decade ago.
“We learned that a lot of people didn’t want to go back to work,” said Hoyt Bleakley, a labor economist at the University of Michigan. “There is a strange phenomenon, the number of people who actually work is more malleable than you can imagine. … We have more job offers than people looking for work, and that hasn’t happened since the ’40s. So under the environment, the rise in unemployment is taking longer to recover due to the weak link to the labor force.”
Without more workers entering the market, there is little hope that wages will halt their rise. However, this carries the risk that the economy as a whole gets caught in a wage-price spiral in which companies raise prices to the point that consumers either cannot afford the products or do not want to afford the products.
The country walks a fine line between rapid growth and recession. When demand slows, companies slow hiring and the economy stabilizes. If demand stays high in a tight labor market, expect even higher inflation.
But there may be some relief for companies. New jobless claims rose to 9,195 in Michigan for the week ended December 3 from 7,425 the week before. There are nearly 44,000 in the state with unemployment insurance, the highest in more than 10 months, which could mean people are taking longer to find jobs.
This gloomier picture could be a sign of a slowing labor market, which is bound to slow consumer spending and inflation. Nobody can imagine how much.
“Despite all these comments about the business, the lack of confidence from companies, there’s still a strong demand for labor out there,” Bleakley said. “The great unknown is whether this will stabilize or we will spiral into a spiral where prices and wages rise in lockstep pushing for a recession.”
The economy is already slowing down, although no one has yet told the labor market that. When more people don’t return to the employment pool, we speak of stagflation. And that’s not a pretty picture for anyone.
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