This week’s headlines… Hiring rebounded in October after last month’s lackluster jobs report; unemployment fell from 4.8% to 4.6% with the economy adding 531,000 jobs. The hospitality sector (which includes hotels and restaurants) led all other economic categories, with 164,000 new jobs. Retail hiring increased by 35,000. Prior to these results, one metric created by a group of Cornell economists—the Job Quality Index—was already showing improvement and a end to the labor shortage. This is mostly because wages have been posting their strongest growth in decades. That is just one factor (along with supply chain disruption and a few other pandemic-driven disruptions) that is driving inflation.
Which brings us to a strange set of circumstances where Americans are flush with cash (they are sitting on $2.3 trillion more in their savings than prior to the pandemic and the median household’s checking account balance was 50% higher in July of this year than it was in 2019), but they also think the economy is lousy (68% in a recent Gallup poll said they believed economic conditions were getting worse). This says a lot about the psychology of inflation… but the real question is will it play out as consumers pulling back on spending?
I do not think so and neither do most economists, which is why predictions for the 2021 Holiday Shopping Season are uniformly robust. The National Retail Federation predicts that sales will surge between 8.5% and 10.5% this year. Even at the low end of that range, it would be a record-setting year, outpacing last year’s record of 8.2%. That alone shows the vastly disparate economic impacts of the pandemic, vastly widening the gap between haves and have-nots with massive government aid (globally, mind you) averting what would have created an economic crisis on par with, or worse, than 2008’s financial crisis. That aid stabilized global stock markets (which had lost nearly $7 trillion in value by last April—regained it all by August 2020 and continued to surge 40%+ above previous levels), it also padded the pockets of most consumers (driving a spending spree that has seen import demand climbing nearly 50%–a huge factor in the ongoing supply chain disruptions)… all of which are feeding inflationary pressures (some which will be transitory, others I think will take a lot longer to unwind).
But this brings us all back to the labor shortage. We did have about four million workers drop out of the workforce, but obviously the concern of retailers and restaurateurs has been around the possibility that extra unemployment insurance disincentivized workers from coming back to the workforce. This clearly has been a factor, though not the only one. The problem here is that low-wage workers had not seen a minimum wage increase in 13 years and adjusted for inflation, many of these jobs have slid backwards over the past three decades. In other words, wage pressures were already building—this already had been among the biggest challenges facing the service industry prior to the pandemic. The result has been a perfect storm of long-term issues playing out all at once. Keep in mind that very few workers made more (or the same) by staying home and collecting extra unemployment benefits than by returning to work. In California, that breakpoint was somewhere in the $16 to $17 an hour range. Which even in rural California markets is borderline, but in all the state’s major markets, it is not a living wage.
I was discussing the issues of “The Great Resignation” with a broker friend of mine in Denver. He scoffs at that title and calls it “The Great Awakening.” His take was that the trauma of the pandemic itself (with many people having become sick or losing loved ones), combined with the fact that service workers were on the front lines (facing considerable health risk), and that they had to be enforcers of public health mandates (while bearing the brunt of abuse from consumers that did not wish to follow them) was simply a breaking point.
He argued that workers at all levels of employment found themselves rethinking their priorities, goals, and lives, in general. And that if middle-class workers were rethinking their careers, how would you not expect those in low wage jobs to not be the canaries in the coal mine? Hard to disagree with that logic.
The latest jobs report suggests that many service workers are starting to come back. A diminished threat from the pandemic, the reopening of schools in September (freeing up single moms) are certainly factors. It could also mean that many of those who were sitting on the sidelines are simply exhausting their savings. Of course, wage growth plays into all of this. That said, I am not sold that the labor issues are going to go away in just a month or two—I suspect this will take a much longer time to unwind. But it is a sign of relief. That said, the longer-term question should be the fragility of business models that do not take factor in living wages for their employees. Regardless of minimum wage laws, market pressures always eventually exert themselves. See you next week.