Premarket Stocks: Jay Powell’s ’90s Dream Is Dead

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The US economy added 263k jobs in November, 63k more than the consensus estimate. Of greater surprise was that average hourly wages rose 0.55%, the fastest pace since January.

The robust job market is good news for American workers, but worrying for the Federal Reserve and stock bulls alike. It suggests that the Fed’s strategy of containing inflation through rate hikes is not entirely working and that more painful rate hikes are on the way.

What’s happening: Managers often try to pass the cost of paying higher wages on to their customers by raising the prices of their goods and services. When prices rise, workers often demand higher wages to keep up with the cost of living. And when they get it, prices go back up to keep corporate profits going. This is the inflationary wage-price spiral that Fed officials are desperate to avoid.

So the holy grail of economics is often to keep wages high but prices low.

“To be clear, strong wage growth is a good thing,” Fed Chair Jerome Powell said at the Brookings Institution on Wednesday. “But for wage growth to be sustainable, it must be consistent with 2% inflation.” The annual wage growth rate rose to 5.1% in November, more than double that target.

In order to return to sustainable wage growth and contain inflation, the demand for labor must be reduced. But in October there were 1.7 job openings for every jobseeker and the participation rate was falling, keeping competition for labor and wages high.

The dream is over: For the past year, Powell has put forward the optimistic idea that wage growth could be slowed without slowing the economy into recession. The end of the pandemic would bring workers back into the labor market from the sidelines, he said, reducing labor imbalances and reducing inflationary pressures.

The thought came straight out of the central bank’s playbook in 1994, when the Fed last dampened inflation and successfully pulled off a soft landing.

But employment today is not what it was then. Baby boomers were at their peak in the 1990s and immigration was strong. All of this led to a surge in the workforce, which kept unemployment low even as interest rates rose.

Last week’s jobs report shows that Americans are simply not returning to the job market.

Powell finally appeared to acknowledge this during his speech last week, citing a surplus of permanent retirements as baby boomers leave the workforce and the impact of the long Covid is felt. Slower working-age population growth, a drop in immigration and a spike in deaths during the pandemic are also long-term downsides to the labor supply imbalance, he said.

In short, workers are in demand because there are fewer workers.

Powell also appeared to admit that his dream of a sudden surge in labor supply was over and that the path to lowering interest rates while avoiding widespread job losses had narrowed significantly.

“Despite some promising developments, we still have a long way to go to restore price stability,” he said.

Goldman Sachs has increased its earnings this year, but the investment bank’s traders and sellers will be fighting for a bonus pool at least 10% lower than last year, according to a Bloomberg report.

Goldman has begun notifying executives that numbers will be reduced by a “low double-digit percentage,” the report said.

Investment bank Jefferies also warned employees this week that 2022 will be a “tough compensation season.”

The recent spate of dire warnings is part of a larger trend on Wall Street.

Overall, bankers who help companies consolidate could see their bonuses fall about 20% this year, while those who help companies raise new capital could see their paycheck fall 45%, according to a recent publication Johnson Associates Compensation Advisory Report.

“This year has been unusually bad,” said Alan Johnson, general manager of Johnson Associates. “I think there will be a whole lot of unhappy people. Some people will look for other jobs… But there will also be layoffs.”

The big picture: No one cries for bankers who make an early career salary of around $200,000 with no bonus. But Johnson says you should be concerned even if you don’t work in finance. Year-end payouts plummet as mergers and acquisitions dwindle, inflation lingers and recession threats rise.

“It’s a canary in the coal mine for the economy. If the canary dies, it’s not good for anyone,” Johnson said.

According to Refinitiv, global M&A volume was $642 billion in the third quarter. That’s down 42% sequentially and the lowest volume for the period in a decade.

A closely watched poll by the National Association for Business Economics found that the majority of its panel of economists believe there is a more than 50% chance America will experience a recession in 2023, most likely in the first quarter of the year.

“The NABE survey participants continue to lower expectations for the US economy, with forecasts of slower economic growth, higher inflation and a weaker job market,” said NABE President Julia Coronado.

So what will lead us there? More than two-thirds of these panelists said the biggest factor in their gloomy economic outlook was the Federal Reserve’s policy of tightening interest rates. Nearly 70% cited “too much money tightness” as the top downside risk.

More Darkness: Less than a quarter of panellists in the bearish poll believed the likelihood of the economy avoiding a “major recession” was more than 50:50, and none of these respondents put the likelihood of a soft landing at more than 75%. .

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