Jobs, Inflation, and the Fed’s No-Win Game

AI efficiency, tariff uncertainty, and BLS revisions put jobs in the spotlight.

KEY TAKEAWAYS

• AI is reducing the need for hiring, while tariffs add uncertainty

• BLS downward revision showed 911,000 fewer jobs created than estimated

• Weak labor markets are the first sign of slowdown and possible stagflation

• NFIB survey shows easing wage and price pressures

• The Fed may finally have room to prioritize employment

MY HOT TAKES

• AI is fundamentally reshaping hiring and efficiency trends

• Tariffs amplify corporate hesitation to expand payrolls

• The labor market is weaker than headline data suggested

• Phillips Curve logic is alive and well in today’s economy

• The Fed’s paralysis is no excuse–action is needed now–yesterday’s NFIB data supports action

• You can quote me: “AI is quietly replacing the need for new hires–the hiring slowdown is no accident.”

It ain’t easy. No, it ain’t. Wow, talk about social evolution! I can’t believe that my intentional use of the formerly non-word “ain’t” is actually acceptable to all of my grammar and spell checkers. Back in the day, when I was schooled in grammar, use of that non-word was likely to yield a big “F” on your work, maybe even corporal punishment. Really, it’s not easy to keep up with social evolution, either. I hinted at it in yesterday’s newsletter/blogpost. Artificial Intelligence has begun to change hiring patterns, and the trend will continue. Companies are likely beginning to rely on AI to make its workers more efficient. That means–really–less workers are needed to get the same job done. If you are a company trying to increase its profitability you would slow your rate of hiring and provide AI tools to your employees–if you were rational. If you are a company which is worried about rising material costs due to tariffs, you are likely to stop hiring altogether until you get relief or more clarity on exactly how those tariffs will affect your bottom line. How can you continue to grow revenues with the same number of employees? The answer, my friends, is simple: artificial intelligence. Got it? 

Could these factors be the cause of yesterday’s employment reckoning where the BLS (Bureau of Labor Statistics) reconciliation/benchmarking of jobs data found that for the year ended in March, it overestimated job creation by 911,000 jobs. Never mind the reason–you can also read about that in yesterday’s newsletter/blogpost–rather, focus on the implication, which is that the labor market is not as strong as we might have hoped. 

A weak labor market is ingredient number 1 for an economic slowdown. You need to have a job to pay for… stuff. Tomorrow, we will get the latest inflation reading (also, ironically from BLS), which is likely to show a continued, albeit slight, increase in CPI. If we see that increase, specifically in core goods, it can spell trouble in the form of stagflation, that feared condition first discovered in the 1980s which includes low economic growth and inflation–an almost impossible condition to cure with tweaking Fed Funds up and down in 25 basis-point increments. In other words, the Fed is ineffective in fighting stagflation using its typical modus operandi, leaving it with no alternative other than to quite literally put the economy into a stall. That’s a nice way of saying “recession.” We don’t want that.

So, are hopes of a so-called soft landing fading fast? Well, to be clear, not all numbers suggest that the economy is headed for the rocky shoals of slow growth and inflation. First, let’s be clear, the employment challenge, regardless of the reason, can be combatted with trade policy certainty and more accommodative monetary policy. The former is up to the administration, and the latter is up to the Fed. The Fed has been reluctant to cut interest rates out of fear that it will allow post-pandemic inflation to re-ignite. But will it?

I saw an interesting chart on Bloomberg this morning which showed some of the constituents of yesterday’s NFIB (National Federation of Independent Business) Small Business Optimism release. Check out the chart and follow me to the close.

This chart shows two data sets from the NFIB Small Business Optimism survey, Job Openings Hard To Fill (green line) and Price Changes (white line). You can see by this chart that those two data points were already in a longer-term downtrend, but that trend has accelerated recently. On first glance, you would deduce that conditions for small businesses are improving. According to these numbers, it certainly is, but there are bigger implications.

Folks, we simply cannot avoid the Phillips Curve. The Phillips Curve shows the relationship between unemployment and inflation, suggesting that when unemployment is low, inflation tends to rise, and when unemployment is high, inflation tends to fall. It was first introduced in 1958 by economist A.W. Phillips, who observed that tight labor markets in the UK led to faster wage growth. The Fed loves to refer to this relationship. When there is “slack” in the labor market–usually caused by rising unemployment–workers, more desperate for jobs, are willing to accept lower wages, easing cost pressures on employers. Conversely, a tight labor market is detailed by companies actively competing for laborers, being forced to increase wages, ultimately pinching margins. You know what comes next. Inflation as companies pass cost increases on to consumers. This is economics 101!

That green line in the chart is consistent with what we learned yesterday in the BLS reconciliation of its monthly estimates with the actual data from the Quarterly Census of Employment and Wages (QCEW). The labor market is indeed weakening. That is why job openings are easier to fill. Because they are easier to fill, inflation-causing wage pressure is easing. Did you get that? Lower inflation pressure! That should clear the path for the Fed to focus on the labor market.

Now, I know that this thesis requires accepting A.W. Phillips’ theory. If you don't, guess what? You can fall back on the white line in the chart above which directly addresses prices. Respondents are asked “During the last three months, did your firm change the average selling price of your goods or services?” The white line shows, clearly, that less companies are changing prices. The trend is clear, despite the announcement and implementation of tariffs. Do you want to be convinced further? Not shown on this chart is the “planned price changes” data set which shows a similar declining trend. Less small businesses are changing prices and less plan to do so in the future. Whether that is caused by less wage pressure or not is not as important as the combination of those indicators which indicate lower inflation pressure.

If you are the Fed, tasked with price stability and maximum employment, your job is not–ain’t– easy. There is a tradeoff between the two. Sometimes, the Fed has to deal with both, leaving it paralyzed. It would seem, based on these numbers at least, that this ain't one of those times. Get to work Fed.

YESTERDAY’S MARKETS

Stocks climbed yesterday after we learned that the Bureau of Labor Statistics overestimated the strength of the labor market. Bad is good if you are a fan of Fed rate cuts. That reconciliation was, put bluntly, bad. Stocks rallied on the news, but bonds did not, and yields climbed.

NEXT UP

• Producer Price Index / PPI (August) is expected to show a monthly increase of 0.3%, lower than last month’s 0.9% price gain.

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