As I reported in this space recently, the U.S. Federal Reserve has been in sustained catatonic hysterics about “spreading labor shortages” in the United States, going back several years, as evidenced by Beige Book passages nearly too numerous to catalogue.
This week, the U.S. Labor Department reported third-quarter unit labor costs were down 0.1% year-over-year.
As noted by many, the Fed long ago ossified and since at least 2008 has chronically projected inflation, interest rates and economic growth higher than is obtained.
Perhaps underlying this petrified bias has been an acute squeamishness about labor markets, especially as advanced by regional Fed presidents. The Fed Beige Books are detailed compendiums of worsening shortages of “skilled” and “unskilled” workers.
The labor shortages are so dire…as to result in falling unit labor costs?
But is the third quarter decline in labor costs a one-off? Well, actually since the fourth quarter of 2015, unit labor costs are up, as in 0.20%. Not annually, that is in total.
Making matters more curious, the Fed recently and abruptly ceased publication of its once ballyhooed Labor Market Conditions Index, which appeared on course to reveal labor markets were easing, not tightening.
The Fed has been grasping at straws for years to justify monetary tightening, even as it chronically undershoots a putative 2% average inflation target on the PCE, and even as labor costs flatten or decline.
The new Fed Chair, Jerome Powell is said to be “dovish,” but what that means in the current context is debatable. Let us hope that under Powell the Fed suffocates the economy a bit less.
While some will praise Chair Janet Yellen upon her departure, in truth trillions of dollars of real output, wages and profits have been foregone to fight an inflation bogeyman.
For investors, Powell appears to be the best option for now. The S&P 500 is richly priced, but interest rates are low, and will likely stay low.
Slow growth ahead? Probably, but not if Powell gives in to the tight-money crowd. Watch carefully.