Jobs and the Meaning of Wage Pain

The market has appropriately re-priced the Fed in the wake of the Jackson Hole comments by Powell and much of what the Fed intends to do will be driven by the evolution of labor market fundamentals. For the market it is hard to determine what is a good number. Ever weaker job growth to take the heat off the Fed is a positive on the one hand, but of course very bad for growth and profitability on the other. What is more certain, however, is that the pain Powell referred to at Jackson Hole may fall disproportionately on workers’ wages, at least initially. After all, the Fed needs to push compensation lower to reduce the risk of a negative feedback loop that could push the US into an uncomfortably high inflation regime.

The chart shows corporate profits and labor compensation as a percent of national income.  What is interesting is that over the extended period of monetary accommodation since 2009 (QE/0% rates) the share of labor compensation, in gold and inverted, touched record lows, and remains well below its long-term average. In effect, corporates were the big beneficiaries over this period with the share of profits surging to record highs. Fiscal stimulus and monetary accommodation soothed the shock over the Covid pandemic, and that share remains close to record highs today.

But, not for long. Workers’ compensation will suffer in absolute terms, but in relative terms the pain Powell refers to will be even worse for profits, at least in relative terms. This you can see in the gray recession bars in the chart. In every recession over the past 50 years the share of profits in national income has fallen, in most cases significantly. 

The Fed’s incentive is to choke growth momentum to achieve its objectives and they are more than willing to tolerate a recession to do so. Odds are rising that this is precisely the direction we are headed. If the Fed succeeds, notwithstanding the hope of monetary perfection in a soft landing, it is a struggle to see how profit expectations as they are now configured can persist.

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