Friday’s jobs report left a lot of folks confused. Some think it supports a hike. Some think precisely the opposite. We’ve argued that the Fed could very well defer to December if they so choose by pointing to the August NFP miss (although it was modest), a contractionary PMI print, and lackluster productivity. And let’s face it, inflation may be “getting there,” so to speak, but it’s certainly nothing to write home about.
So what exactly does the future hold for the US economy – our very own, homegrown “cleanest dirty shirt”? Here with a concise and somewhat dour assessment is Deutsche Bank:
“The last several years of data dim to prospects of a sustained increase in wage inflation. In other words, the August data look more like the rule than the exception. In the long run wage increases must pay for themselves; that is, workers should be paid their productivity. If wages accelerate more rapidly than productivity then margins suffer in the absence of pricing power, which is likely to remain very low due to globalization. Our concern is that even the present subdued level of wage inflation is an overshoot relative to underlying price inflation and productivity growth. Given in addition the continued strength of job growth, the corporate sector might eventually choose to defend margins by slowing the rate of hiring. Since workers are also consumers, demand would slow, putting further pressure on margins. This is the endogenous slowdown – endogenous in the sense that in the present low- productivity environment it can occur without any “help” from the Fed and absent an exogenous shock.”
See how that’s a vicious circle? Thanks to a globalized economy, pricing power is limited. So if you’re increasing wages, but not getting a commensurate increase in productivity, well then your margins shrink and if you can’t increase prices, then you have to stop hiring. But if you stop hiring the jobless will stop buying, denting your margins even further. This is the problem with full employment, pressure to raise wages, and lackluster productivity.