Your Friendly June Mailbag Potpourri

Every now and then, we aim to serve our audience rather directly—answering relatively common questions in our mailbag. Dear readers, today is that very day! Without further ado, let us pop open the old mailbag and touch on some things you fine folks are wondering about. Here are a few, lightly edited for clarity.

I’ve had a lot of friends get laid off recently, and I also keep hearing unemployment is low, which is hard to reconcile. How do you measure unemployment?

The Bureau of Labor Statistics (BLS), which produces the flagship jobs report, has many measures. There is the U-3 unemployment rate—the headline rate—which is the percentage of people in the labor force who are out of work. And five others, culminating in the broad U-6 rate, which is the percentage of those out of work, working part-time for economic reasons or only marginally attached to the labor force.

The unemployment rates come from the BLS’s survey of households. By contrast, job gains and losses come from the companion establishment survey, where businesses report the number of jobs they added or subtracted from payrolls. These numbers, added together, form the monthly change in nonfarm payrolls—which you see in headlines as the number of jobs added (or lost, as the case may be). Often, these two gauges may tell different stories because of the methodological gap.

But the reader’s question interestingly highlights something often overlooked in this figure: It tallies the net gain or loss in payrolls. Layoffs in one company, industry, state, town, etc. get offset by hirings in other companies, industries, states, towns and the like. So if one industry is shedding workers but another is adding them, a lot of that activity offsets. Reporting it this way—like all statistics—brings some tradeoffs. It gives a nice snapshot of broad national trends and helps people see through the noise. But it can also gloss over other shifts, making it important to look at industry-specific data for more granular information.

To weigh layoffs against hiring, the BLS’s Job Openings and Labor Turnover Survey (JOLTS) is a good option. It shows hires, layoffs, quits and openings on a national level and by region and industry. Like the Employment Situation Report, it is backward-looking, but it can help put headlines and anecdotal evidence into context.

There are always stories about young people being out of work for either medical reasons, because of substance abuse or other reasons. Is this an economic risk down the road?

We have seen these stories, too, and it is clear some folks are struggling. Our hearts go out to those suffering with medical, mental health and substance issues. But we think extrapolating this to a macroeconomic risk is a stretch. For one, the discussion falls under the category of anecdotal evidence writ large, where news stories will profile a family or three and give the impression that their situation is common. We see it a lot with things like student debt and credit card debt, too. The stories are detailed, compelling and may even hit close to home.

But to pose an economic threat, that story must reflect a very wide swath of the populace. Yet the broad data sets make it clear these stories are the exception, not the rule. The demographic breakdown of employment data suggests the same is true of young folks today.

According to the BLS’s labor force participation rate data, an average 37.1% of 16 – 19 year olds were in the work force over the 12 months ending in May—the highest since 2009.^[i] (The BLS doesn’t consider “student” a job, hence the low absolute figure.) Going a bit older, an average 71.5% of 20 – 24 year olds were in the workforce in the same span.^[ii] That is on par with levels seen across the majority of the decade pre-pandemic. So while we are sure there are tragic stories worth noting about drug abuse, illness, pandemic effects and more, the broad data don’t suggest a stark shift that poses a macroeconomic threat.

And, remember: For as long as mass media has been a thing, headlines have bemoaned the younger generation’s alleged shortcomings and dim economic prospects. With the Baby Boomers, it was the hippies spending too much time at festivals with flowers in their hair and not wanting to work for The Man. With Gen-X, it was sheer apathy. With Millennials, it was graduating into recessions and not getting married and forming households. But in all cases, they defied the stereotypes and funneled into employment, wealth generation and life milestones. We doubt it is different this time. And in all cases, it was a growing economy that created job and business opportunities for these folks—not the other way around. So as long as technology and investment are humming forward (and powering stock returns!!), human capital should follow as it always does.

How bad is inflation compared to wages?

A simple question with an answer that could take 1,000 words, alas—so we will give you a picture. As Exhibit 1 shows, wage growth tends to echo inflation. Consumer prices move first, then businesses adjust wages and salaries to compensate. If your pay changes annually, it probably does so in relation to changes in living costs (and your company’s operating costs and revenues, which determine how much it can afford to raise your pay) over the past year.

Exhibit 1: Wage Growth Lags Inflation

Source: St. Louis Fed, as of 6/18/2024. Consumer Price Index and Average Hourly Earnings of All Non-Supervisory and Production Employees, year-over-year change, January 2021 – May 2024.

This time around was no different. Wage growth accelerated after inflation accelerated. No doubt frustrating many, its growth rate didn’t get as high as the inflation rate. However, while it has slowed, it has exceeded the inflation rate since March 2023. So for the past year-plus, overall and on average, workers have been regaining lost ground.

So how do wages and inflation compare over this whole miserable inflationary stretch? Since the end of 2020, headline consumer prices are up 20.6%.^[iii] Wages are up 19.2%.^[iv] That is getting pretty close! But for a lot of households, it probably doesn’t feel close. CPI isn’t a cost-of-living index. An individual household’s costs won’t match the inflation basket. Your personal living costs may have risen more than one-fifth since 2020. And for wages, these are broad averages. Your personal pay may have risen more or less than 19%. The real story here is that society, overall, has swallowed the inflation spike and is getting on with things. In our view, this is a big part of what markets have been pricing in since October 2022.

What do you mean when you say inflation has lowered? Prices are still high.

Indeed, they are. Inflation is a rate of change. A growth rate. Movement in the level of prices. When the inflation rate rises, it means prices are growing faster. When it falls, if the rate itself remains positive, it means prices are rising at a slower rate. Only when the inflation rate is negative are prices actually falling. This, in economic terms, is deflation.

Look back to Exhibit 1, and you will see the headline inflation rate is down from its high, 9.1% y/y in June 2022, to 3.3% last month.^[v] This is much closer to the historical average inflation rate, which has always been a side effect of money supply and economic growth. But like we said, even with rates’ slowdown, prices are up just over 20% since 2020 ended. And they are still up 6.0%, cumulatively, since inflation peaked.^[vi]

That is the bad news. The good news is inflation inflates more than just prices. It also typically inflates wages at a lag, as we just showed. And it tends to inflate corporate revenues, which helps sustain profit margins and earnings—which, in turn, helps stocks overcome inflation. Yes, inflation fears contributed to 2022’s bear market, along with a host of other worries that whacked sentiment. But stocks recovered quickly and are back to clocking all-time highs despite elevated prices.