We are coming upon the most important employment number in ages. I wish it weren't. I wish that Friday's non-farm payroll report would show great hiring and some wage growth of note. But lately I have been thinking that the Fed doesn't really want to see any wage growth to speak of and is prepared to raise rates endlessly until we don't get higher salaries.
Now I know the Fed has to worry about inflation and growth and we want the Fed to be vigilant. When we hear that Amazon (AMZN) is paying $15 an hour to workers, up from what seems to be an average of $12, there's a genuine freak-out among investors who quickly dumped most retailers except the one that would seem to be most vulnerable - Walmart (WMT) , something that made no sense whatsoever when you think about it.
But what worries me is the fundamental ethos of a tightening. How much is really needed? Is the Fed really trying so hard to cool the economy that it crushes wage growth?
Our nation has a couple of inflationary problems.
First there's commodity inflation. When PepsiCo (PEP) reported yesterday, for example, they talked about commodity inflation, mainly the cost of aluminum cans. But they went up in price because of tariffs. If the president hadn't put tariffs on aluminum there is no doubt that prices would be stable. There's a surfeit of aluminum being made in the world.
Then there's oil. The world demand for oil is now growing above trend line, at about 1.5% versus 1% for the last 20 years. At the same time many countries are producing far less than their potential, namely Venezuela, Libya and Mexico. And we've re-instituted a boycott of Iranian oil. That's man-made too. The Fed cannot product more oil. My hope is that the new trade deal lowers the price of lumber which has been coming down from a spring peak. But it won't lower the price of steel which also has tariffs on it. Strangely though, the price of a key steel commodity, hot rolled, has peaked and is also coming down.
Now there are some areas where there are certainly some inflation. Housing affordability has come down mostly because the Fed has raised rates but also because there isn't enough land zoned for housing as there used to be. If you look at the numbers from Lennar (LEN) , the nation's largest homebuilder, you can easily craft a slowdown story. New orders were below consensus estimates. So was backlog. Gross margins appear to have peaked. Those indicators show that the Fed has won already against housing.
Autos? The price of a new car is up again in part because of a rise in commodity prices. But I don't think the new prices are sticking or the new car dealer stocks wouldn't be so weak. Used cars, which have no tariffs and have plenty of the latest features, are selling well. It's a big change of pace. I think the auto companies should be lowering prices and incentives do abound. I think the Fed has won there, too, and the stocks sure indicate that.
Some traditional bellwethers of inflation are pointing down. Linerboard prices, a basic of shipping, are very weak. Chemical prices are rolling over.
So, where's the real inflation that the Fed can control?
Labor. We have nearly full employment. When you have that, wages are going to trend higher. Amazon's wage increase really decked the market yesterday. But when I look at Amazon I am seeing a company that is working to control health care costs, and I think will do so, and is using incredible new warehouse automation by Honeywell (HON) . I am not denying that wages are going higher. I am insisting that Amazon is a brutally efficient company that has been one of the most powerful forces at lowering prices for the consumer because of how well it handles logistics. Anyone who thinks that Amazon is an inflationary force simply doesn't understand economics or doesn't have Prime.
There are many other pockets of inflation. I know that we keep hearing about trucking inflation because of the expense of drivers. But a lot of the issues in this particular form of inflation have to do with rules put through by the Federal Motor Carrier Safety Administration restricting the number of hours drivers may be on the road. That's what is causing the real problem. So more drivers have to be added and it's easier said than done because there's an intelligent aversion to learning how to drive a truck, namely the advent of autonomous vehicles. As Hugh Johnston, the CFO of PepsiCo reminds us, the average driver is 49 years old and it seems almost to be a dying profession.
Which brings us to the real source of wage inflation: a lack of people to take jobs. We are now employing lots of people thought to be unemployable. Yesterday we heard from Marty Mucci, the CEO of Paychex (PAYX) , a company with a national read on employment, and he said that many companies are now beginning to wave drug testing. That's how badly they want to keep employees. Parolees who have been in prison for selling and using marijuana are getting out and finding jobs in a society that is now more tolerant of cannabis.
I know we are opening a new restaurant in Brooklyn and while it is anecdotal we have our fingers to the pulse enough that we know that it's hard to find a dishwasher in New York for less than $16, well above the minimum wage. Why? I think it is because immigration has become so restrictive that there is no longer excess supply in the labor pool.
The profit margin isn't that great in restaurants so I would not be surprised if we see fewer restaurants opening because the public won't pay high enough for food to cover the costs of running a place. The Fed can't create new people. So raising rates for those trying to open new places accomplishes one thing: fewer places, more labor. Don't forget that the Wall Street Journal reported mall vacancies are at a seven year high.
But that brings me to the real issue here: there has been almost no wage inflation in this country forever. However, the execs in the country are making more than they ever have. The gulf is ridiculous. I think it is just not right for the Fed to say "you know what, it's really good, so let's just crush it so it is not as good" because that eliminates any hope that a working person can ever catch up, something that is so necessary when you measure the cost of health care which has gone up like crazy, another cost that the Fed can't change.
I say that the Fed should be careful what it wishes for. There is enough new technology coming out via the cloud kings that naturally suppress the support staff and there is enough downward pressure on goods, courtesy Amazon, and auto prices and housing are now under control. Why not let it run? Why be so afraid of a small amount of wage increases?
To throw us into a recession from higher rates because of the pennies per hours increases that we have seen so far seems wrong and the gulf between the rich and the poor just unfathomable.
So I am urging the Fed to consider what it can control and what it can't, to allow the worker to at last make a little more money and not be so dogmatic about rate hikes that simply may not be necessary given what's actually happening to the average working person in the United States.