Employment-related inflation has peaked

Employment-related inflation has peaked. Wages are not coming down but applicants are going to become more plentiful while job openings decrease. And this will put a lid on the acceleration of employment costs.

I’m calling it. It becomes obvious this summer that the situation has turned. You can throw this post in my face in October if it turns out I was wrong (or early, I will definitely claim early).

We’re going to have a very healthy and happy labor force, paid more than it had been prior to the pandemic. But the labor shortage is going to ease considerably in the second half of this year. We’re already hearing about this easing on conference calls across several industries. Including from both Walmart and Amazon, the largest and second largest private employers in America. They say they’re overstaffed. Other CEOs and CFOs have been telling Wall Street that finding people has become easier this spring. Or that they will simply need less people. The effect is the same.

Employers are now getting some breathing room as the labor force leaves the home and returns to work. The commuter trains into New York are packed again. Anecdotally, everyone I know has a schedule this year. “I”m doing Tuesday through Thursday,” the Wall Street guys say. “I’m in every Monday and then we see what happens,” the small business owners tell me. Nobody my age works Friday, it appears. That’s why Thursday night is the new Saturday night in the summer. Thursday night is tequila night in middle class suburban enclaves up and down the east coast. I joked around the other day that the best thing that could happen for Manhattan’s economy would be a recession. You’ll see everyone from Scarsdale, New York to Alpine, New Jersey, to Port Washington, Long Island back in midtown, bright-eyed and bushy-tailed.

One of the brightest spots from the recent retail earnings reports was that people are refreshing their wardrobes and buying clothing again. This is a precursor to rejoining the living world outside of our homes. Employers are expecting to see their employees again. And the more you hear the word “Recession” on everyone’s tongue, the most pressure people will feel to be seen by the boss and counted among the productive. What are you gonna do, tell your wife you got fired because someone five years younger was more willing to come to the office than you were? Bosses are going to boss. I showed up at work for thirty years, five days a week, no questions asked. Your millennial ass can give us three days a week. Get here tomorrow or someone else will. 

Unemployment will remain low, I would guess, but the layoffs that are starting will impact hiring manager mentality. Less pressure. No more $1,000 bonuses to work at Wendy’s. More applicants for open positions. Possibly less open positions. People stop scheduling interviews and then ghosting the interviewer (yes, this was a phenomenon over the last six months). A lot of would-be entrepreneurs are finding out why most new businesses don’t succeed. Because it’s hard. Maybe their idea of selling cupcakes on Instagram wasn’t particularly well thought out. It was worth a shot. Now what? LinkedIn, that’s what.

Collapsing prices and enthusiasm will deal a crushing blow to the stock option orgy happening in the venture-backed startup realm. The mania for growth companies in the public stock market had fueled some unrealistic expectations for employee comp among private companies. Lots of companies were worth tens or hundreds of millions of dollars on paper despite having never produced even a hundred grand in revenue. But they were hiring like crazy. Scale up! they were told. Now! Capture the TAM! That’s all done. Startups will accept a third of the valuation (or less) than what they had been expecting as recently as January or they will get nothing at all from their backers. This will factor into headcount and it will factor into compensation packages. Every year there’s a new crop of 22 year old kids coming out of college who would be more than happy to do the work of a spoiled 29 year old. Believe it or not, most venture investors and entrepreneurs will greet this new, more rational environment for company-building with relief. If you’re the one paying the salaries, hiring the people or bankrolling it all, you’re looking for a breather from the maelstrom that was 2020-2021. You’re about to get it.

Roughly $8 trillion in value has been wiped out of the market capitalization of the US stock market. American households have 33% of their wealth in stocks. The economy is going to feel this. It’s a negative wealth shock. It could be worse, this isn’t so terrible. The S&P 500 is still about 15% above where it was before the pandemic began. But nobody feels wealthier this year than they did last year. Especially now that the housing market is on the verge of rolling over. The Mortgage Bankers Association is predicting a 37% drop in volume this year, now that the average 30-year fixed mortgage has risen from 3.11% to 5.25% in the last six months(!). The mortgage banker layoffs are already coming, hot and heavy. This is a sneak preview for what you’ll see in other industries where the pandemic-era growth rate was obviously going to prove unsustainable. Falling home prices, falling stock prices, falling credit availability (that’s coming next, watch for it), falling small business confidence, falling consumer sentiment – this is where we are now.

Expect continued pressure to find qualified workers in some pockets of the economy. Perhaps trucking. Perhaps hospitality. Or nursing. The pilot shortage could remain sticky. We’re not out of the woods. Things will shift from one industry to another. Shortages will pop up here and then there. But it’ll be contained. The big picture is we’ve seen the worst of the labor shortages and related costs. The Fed is already getting its way.


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