Chart of the Week : U.S Employment Cost Index
Head of Macro Analysis
Summary: Our ‘Macro Chartmania’ series collects Macrobond data and focuses on a single chart chosen for its relevance. This week, we focus on the U.S. Employment Cost Index. It shows that inflationary pressures are finally fading on Main Street but not good for reasons.
Click to download this week's full edition of Macro Chartmania.
The market narrative machine is fascinating. In 2022, the bear market narrative was « inflation shock, rates shock and recession shock ». For 2023, the market narrative is rather bullish. Analysts expect that inflation will move lower but will remain sticky, that a mild recession will affect most of the developed economies and that central banks will hike a little further (probably until the start of the second quarter) before pausing for the rest of the year. It is certainly too early to know the steepness of the recession and whether the United States will manage to avoid it. This is an ongoing debate among economists.
But there are early signs inflation is finally receding, at least in the United States. This is not the case in the United Kingdom where the October CPI reached 11.1% year-over-year, for instance. In the United States, higher wages reflecting Covid unbalances, worker shortage and tight labor market partially explained the increase in prices. This is now reversing. In just the last several weeks, we have seen major layoff announcements from the tech sector (Meta, Stripe, Paypal, Microsoft, Amazon etc.). But this is not just a technology story. We have seen layoffs in other sectors of the economy, from the real estate promoter Redfin and the trucking giant C.H. Robinson among many others.
To understand why layoffs are starting now, we need to first understand the sequence of the economy. Employment is a well-known lagging indicator. In the past, it has already happened that job losses started only with a lag of several months after the economy entered into a recession (job losses started 8 months after the official start of the 1974 recession, for instance). But some sectors of the economy are more sensitive than others to higher interest rates, which can help predict whether or not we will face massive layoffs. This is the case of the housing market especially (we used to say that the housing market is the business cycle in the United States). With the cooling of the housing market which started in early 2022, the consumption of things associated with home buying are also going down - with a lag. Think home appliances, home-building tools etc. The housing slowdown is spreading into the rest of the economy. This puts pressure on big durable goods and thus on the industry that moves these goods around the world. This explains why C.H. Robinson fired 650 employees one week ago. This is only the beginning, in our view.
Mass layoff to come means that the drop in wage increases, which has just started, will continue in the coming months. In the below chart, we have plotted the National Federation of Independent Business (NFIB) compensation plans and the Employment Cost Index. Only a net 23 % of small businesses plan to raise compensation in the next three months. This is much lower than a few months ago (when it was at a cycle peak of 32 %). Compensation practices of small businesses tend to lead to broader wage and salary growth. Therefore, we can expect that the Employment Cost Index, which has started to decelerate recently, will continue moving downwards, likely well below 4% going into 2023. This could ultimately ease inflationary pressures and open the door to a slower pace of Fed rate hikes. This echoes comments from Fed Vice Chair Lael Brainard earlier this week : “It will probably be appropriate soon to move to a slower pace of increases.”
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)