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Reports on a Quarterly Survey Conducted: Qualifying Shortage (Labor)

There isn’t a day that goes by in 2017 where some study is released or anecdote is published purporting a sinister labor market development. There is a shortage of workers, we are told, often a very big one. The idea is simple enough; the media has been writing for years that the US economy was recovering, and they would very much like to either see one and be proven right (and that recent revived populism is illegitimate), or find an excuse why they weren’t really wrong (so that populism can be described as indirectly illegitimate).

US Nonfarm Payrolls Missing

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US Nonfarm Payrolls Missing

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Today Bloomberg reports on a quarterly survey conducted and prepared by the National Association for Business Economics. Their results show, no surprise, the number of firms reporting trouble hiring workers has risen this year.

Many economists expect the jobs market to start putting pressure on wages and inflation, though that phenomenon has yet to fully materialize.

To make matters worse, for the study rather than the economy, basic economics (small “e”) is just ignored in favor of “the unemployment rate can’t be wrong.”

“When you cannot bring in the workforce you need, it’s going to affect your sales and affect your profits,” Jankowski said.

US Retail Sales Stagnation, Jan 1992 - Jul 2017

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US Retail Sales Stagnation, Jan 1992 - Jul 2017

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Spoken like a true economist. What business in existence would let a shortage “affect your sales and affect your profits?” That’s utter nonsense, for any firm that is facing such a situation would immediately correct it by paying a market-clearing wage. Unlike fantasyland Economics, there is such a thing at every level. To believe otherwise is to live in a land of regressions and unquestioned allegiance to the BLS definition of the labor force.

US Retail Sales SA Missing, Jan 2007 - Jul 2017

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US Retail Sales SA Missing, Jan 2007 - Jul 2017

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Let’s assume the survey results are correct, and that firms are finding it hard to attract candidates. Coming from the other direction, it’s not hard to translate what they are actually saying. In other words, the mainstream always interprets “hard to find workers” as a shortage situation, when that is only one possible interpretation. Since the price of labor over the past decade has barely risen, it isn’t, can’t be, the most likely one.

Instead, there is an unspoken stipulation that is never explicitly stipulated. Businesses are surely finding it difficult to hire good workers at the rate they today want to pay. Obviously, that rate is insufficient so as to clear market demand for supply. Why don’t they pay that market-clearing rate?

Simple. Because unlike how the economy is talked about in the media, the one always derived from the unemployment rate, actual business is sluggish and uncertain at best. There is no rush to find qualified workers because in reality the economy is tight – not favorably tight as in no slack in the labor market, but more so tight in that there is little margin for addition.

US GDP Corporate Cash Flow, Jan 2000 - 2017

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US GDP Corporate Cash Flow, Jan 2000 - 2017

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In other words, firms may wish to hire qualified candidates, though not because things are booming but rather because businesses wish to hire qualified candidates (to replace those that leave, or those that are ineffective and incompetent). They are in no rush to do so, else they would pay the market-clearing rate. The media always assumes/characterizes hiring as at the margins, meaning an increase to staff. That doesn’t have to be the case, and for the vast majority of hiring it isn’t.

Businesses find employees when they can, hoping to luck into one here or there, paying them as little as possible as reflection of the lack of economic momentum that always characterizes this economy. There is no labor urgency because there is no economic urgency, and businesses in aggregate cash flow terms can’t afford to change it (see above). They would rather muddle through with what they have now than actually pay more for competence.

It’s as cutting an indictment as there could possibly be for this economy, so you can understand why in the mainstream it isn’t ever thought of in this way.

It is the media that changes the interpretation so as to include:

US GDP Corporate Cash Flow Longer, Jan 1949 - 2017

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US GDP Corporate Cash Flow Longer, Jan 1949 - 2017

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The [survey] results reinforce data coming out of the U.S. this year, which show a tightening labor market amid low interest rates and an economic expansion.

You can’t fool economics (small “e”). If that were anywhere close to being true wages would be surging right now. Therefore, all conclusions with respect to labor conditions have to include the following relevant caveats: 1. There can be a labor shortage at this very moment at the wage rates businesses are currently willing to pay; 2. The rate they are willing to pay is not the market-clearing rate; 3. They aren’t paying the market-clearing rate because actual economic conditions are, as they have been all along, poor.

US Payrolls Average Weekly Earnings, Jan 1990 - 2017

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US Payrolls Average Weekly Earnings, Jan 1990 - 2017

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The technical definition of recession is thought to be two consecutive quarters of negative GDP. That isn’t actually true, as the dot-com recession featured two quarters of contraction in GDP non-consecutively, spread out over three. Likewise, the mere fact that GDP is positive and has been positive for any number of quarters or years does not by itself technically meet the specifications for expansion. The difference between positive GDP, or any positive numbers for any economic account, and true expansion can be, as we observe in labor conditions, enormous.

US GDP Baseline, Jan 1993 - 2017

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US GDP Baseline, Jan 1993 - 2017

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Full story here
Jeffrey P. Snider
Jeffrey P. Snider is the head of Global Investment Research of Alhambra Investment Partners (AIP). Jeffrey was 12 years at Atlantic Capital Management where he anticipated the financial crisis with critical research. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP
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