Jay Powell's dream of the 90s is dead
New York (CNN Business) The US economy gained 263,000 jobs in November, 63,000 above the consensus estimate. The larger surprise was that average hourly earnings rose by 0.55%, the fastest pace since January.
The robust jobs market is good news for American workers, but concerning for the Federal Reserve and equity bulls alike. It indicates that the Fed's strategy to rein in inflation by raising interest rates isn't quite working and that more painful interest rate hikes are coming.
What's happening: Executives often try to pass the cost of paying higher wages on to their customers by raising the prices of their goods and services. When prices rise, workers often demand more pay to keep up with the cost of living. And if they receive it, prices rise again to maintain corporate profits. This is the inflation-inducing wage-price spiral that Fed officials are desperately attempting to avoid.
The holy grail of economics, then, is often to keep wages up but prices low.
"To be clear, strong wage growth is a good thing," Fed Chairman Jerome Powell said at the Brookings Institution on Wednesday. "But for wage growth to be sustainable, it needs to be consistent with 2% inflation." The year-over-year wage growth rate increased to 5.1% in November, more than double that goal.
Getting back to a sustainable level of wage growth and tamping inflation will require reducing demand for labor. But there were 1.7 job openings for each job seeker in October and the labor participation rate decreased, keeping competition for workers, and wages, high.
The dream is over: For the past year, Powell has advanced the optimistic idea that wage growth could be lowered without slowing the economy into recession. The end of the pandemic would bring workers back from the sidelines and into the labor market, he said, reducing the labor imbalance and easing inflationary pressures.
The thought came straight out of the central bank's 1994 playbook, when the Fed last tempered inflation and successfully executed a soft landing.
But employment today isn't what it was then. Baby boomers were at the height of their careers in the 1990s and immigration numbers were strong. All of that led to a workforce bump that kept unemployment low even as interest rates rose.
Last week's jobs report shows that Americans just aren't returning to the job market.
Powell seemed to finally acknowledge that during his speech last week, citing an excess of permanent retirements as baby boomers leave the workforce and the impacts of long Covid are felt. Slower growth in the working-age population, a plunge in immigration and a surge in deaths during the pandemic are also long-term detriments to the labor-supply imbalance, he said.
In short, workers are in demand because there are fewer workers to go around.
Powell also seemingly acknowledged that his dream of a sudden surge in the supply of labor was over and that the path to lowering interest rates while avoiding widespread job loss had narrowed significantly.
"Despite some promising developments, we have a long way to go in restoring price stability," he said.
More bonus blues for Wall Street
Goldman Sachs grew its revenue this year, but the investment bank's traders and salespeople will be fighting for a bonus pool that's at least 10% lower than it was last year, according to a Bloomberg report.
Goldman has begun informing executives to expect figures cut by a "low double-digit percentage," the report said.
Investment bank Jefferies also warned staff this week that 2022 will be a "difficult compensation season."
The recent spate of gloomy warnings are part of a larger trend on Wall Street.
Overall, bankers who help consolidate companies could see their bonuses fall by about 20% this year, while those who help companies raise new capital could see that paycheck drop by 45%, according to a recent report from compensation consultancy Johnson Associates.
"This year is abnormally bad," said Alan Johnson, managing director of Johnson Associates. "I think there will be a fair number of unhappy people. Some people will look for other jobs... But there will be layoffs, too."
The big picture: No one is crying for bankers who earn an early-career salary of around $200,000 pre-bonus. But Johnson says you should be concerned even if you don't work in finance. Year-end payouts are plunging as mergers and acquisitions dry up, inflation persists and recession threats grow.
"This is a canary in the coal mine for the economy. If the canary dies that's not good for anybody," said Johnson.
Global M&A volume was $642 billion in the third quarter, according to Refinitiv. That's a 42% drop from the prior quarter and the lowest volume for that period in a decade.
Some economists say the Fed will usher the US into recession
A closely watched survey from the National Association for Business Economics found that the majority of their panel of economists believe there is a more than 50% chance of America experiencing a recession in 2023, most likely in the first quarter of the year.
"NABE survey participants continue to downgrade expectations for the US economy, with projections of slower economic growth, higher inflation, and a weaker labor market," said NABE President Julia Coronado.
So what's going to take us there? More than two-thirds of those panelists said they thought the largest factor in their dreary economic outlook was the Federal Reserve's rate hike policy. Nearly 70% cited "too much monetary tightness" as the greatest downside risk.
More gloom: Less than one-quarter of the panelists in the pessimistic survey thought there was more than a 50-50 probability of the economy avoiding a "severe recession," and none of those respondents rated the probability of achieving a soft landing at higher than 75%.
