Alan's Alert 6-9-2021

 

By Alan Baerlocher

 

Jobs, Inflation, & China

 

Regarding yesterday’s JOLTs (Job openings and Labor Turnover) report, I found two things of great interest.  The first is the job openings.  Businesses are getting frantic to find warm bodies to fill vacancies as the economy braces to open back up but warm bodies are not to be found.

In the 20-year history of this report, we have never had job openings at this level.  The slope of the curve is tremendous.  Keep in mind, this report is for April.  JOLTs reports always lag but this is still impressive.  Workers certainly have the upper hand in negotiations with employers.  To me this indicates that wages have to come up to balance the supply/demand curve of labor.  This is basic econ 101.  When demand is high (as it is now), to increase supply, higher wage rates will be required.

On the x-axis is Q, the quantity of labor.  On the y-axis, P, or payments to workers.  The demand for labor has moved from D1 to D2.  To get the market to equilibrium, payments to workers needs to move higher from P1 to P2 so that Q1 will move to Q2.  Until this happens, the labor market will be out of balance.  Worker shortages will continue and this will lead to shortages in goods and services.

 

The Fed has a dual mandate; maintain a stable currency and full employment.  While maintaining a stable currency is subjective, full employment is not.  These worker shortages are giving the Fed the greenlight to continue to run the printing presses hot.

The second point of interest to me in the jobs report was the quits report.

Not only are employers desperate for workers, but the workers smell this desperation and are quitting at the highest rate ever.  What in the world?  I’m thinking some employees might be finding greener grass in other pastures.  Some may have gotten used to the work-from-home scenario and aren’t excited about coming back to the office as re-openings are taking place.  Others might have developed side jobs during the government enforced lockdowns, that they are trying to turn into full time gigs.

Now, according to Austrian economics, to have inflation we need a scenario where the supply of money is high (check that box!), and the demand for money is either flat or down trending.  Reviewing the most recent Personal Savings Rate data from the Fed (last updated 5/28, next update 6/25) we see that savings is still elevated thanks to the unprecedented stimulus pumped into the hands of main street.

I think the scenario we are seeing playout is one where workers have money saved up, aren’t excited about getting back to work, and will live off their savings until they have to get back to work.  This could mute the inflation situation and still cause bottle-necks in the supply chain.  Once this scenario reverses, watch out.  Which brings me to China…

Last night, the PBOC (People’s Bank of China), posted their CPI and PPI numbers.  I always have a hard time believing anything that comes out of China, especially if it would paint their country in a bad light on the world stage.  However, they posted the highest PPI report since September 2008 at 9.0%.

The PBOC also announced their CPI at 1.3%.  So according to the China central bank, high producer inflation has not yet influenced the consumer price index.  This means Chinese factories are absorbing the rising costs instead of passing them on to consumers.  In time, rising costs will force their hand or their profits will plummet and many could go broke. 

 The high PPI print led Chinese officials to announce their intent to introduce price controls. The National Development and Reform Commission, which is a macroeconomic management agency in China, announced that they were making arrangements to “stabilize” the price of “corn, wheat, edible oil, pork, and vegetables”. 

 If Beijing loosens their grip on the producers and factories, allowing them to raise prices, expect prices to raise quickly in the US for anything made in China.  Also, if prices get fixed, expect China to suffer from intense supply-chain bottlenecks, shortages, and black markets in any product the government tries to micromanage.