Life for the US Federal Reserve just got infinitely more complex. Major companies across the country are freezing new hiring or laying off workers entirely. The reduction in employment is a dramatic change from where the economy has been for the past two years.
During the recovery from the Covid Lock-Down, most companies have hung up the “help wanted” shingle. They’ve needed more workers as sales and services have come back online. It is just what we should see in every recovery.
Shops and stores sell more, and they then hire more workers. Workers then spend more, creating more sales, and requiring more workers. Economists call this the virtuous cycle. More workers created more demand, creating more sales, requiring more workers. In short, this is the abundance, which is the foundation of our economy.
But this is all changing. Suddenly major companies are announcing that they no longer have the demand for their goods or services. Sales are so slow that they need to lay off employees.
What’s most troubling is that many of these companies are in the high-tech, fin-tech arena, considered the leading edge of economic growth. Companies in this sector announcing layoffs include Meta, the parent company of Facebook, Twitter, Netflix, and Shopify. And fin-tech companies Coinbase, Redfin, and no doubt soon FTX, the bankrupt Crypto Exchange.
Disney, Apple Computer, and Amazon have all announced hiring freezes, meaning they will add no new employees. Hiring Freeze results in a slow reduction in staff as people retire, relocate, or leave. A hiring freeze reduces the size of the company. It just takes longer.
Judging from the types of companies announcing staff reduction and the fact that many are in the most high-growth sectors of the economy, this will likely be a trend that will continue for some time. And that “virtuous cycle” we just talked about will reverse. Fewer workers, less demand, reduced spending, more layoffs. And the cycle repeats.
Remember that the latest unemployment rate was reported a little more than a week ago. Unemployment stood at just 3.7%, incredibly low by historical standards. And a sure sign of the need for more workers.
So how is it that companies are now seeing lower demand?
The answer, the lower demand is the direct result of the current policies of the Federal Reserve. It’s the flip side of its fight against inflation. By raising interest rates, the Fed automatically reduces demand.
Suppose, for instance, that you wanted to purchase a car, a home, or an iPhone. You would make this purchase on credit, a car loan, a mortgage, or a credit card; as the Fed raises the interest rate, the monthly payment you’ll make on those loans increases. You may decide not to make that purchase at some point because the subsequent costs are too high.
Fewer sales because of higher interest are occurring right now. The Real Estate Market is crashing because mortgage rates have doubled in the past year. Thanks to the Fed’s rising rates. Car loan rates are also higher, as are most forms of consumer credit.
The Federal Reserve is raising interest rates because of its singular focus on inflation. As former Fed Vice Chairman Clarida pointed out last week, the Fed now has one goal: lower inflation. And it is pursuing that goal to the exclusion of all else.
And therein lies our current troubles. Inflation may be declining, although the jury is still out on that. However, employment is beginning to fall, and there can be no doubt about that.
However, this is not the first time we’ve faced this dilemma: how to achieve full employment and stable prices. The employment-inflation balance was the chief economic issue of the 1970s. Like now, the 70s were a time of high inflation combined with low employment. It was during the 70s that the term “Stagflation” was coined to describe this issue.
And just like now, the Central Bank had the same problem. The Bankers want to focus on just inflation. Stable prices are always their chief objective. But veering too far to the tight money, the low inflation side results in a massive loss of jobs.
Back in 1978, two old pols saw the same issue. Senator Herbert Humphrey and Congressman Augustus Hawkins recognized that we needed a balance in our economic policy: stable prices and high employment. So they wrote the Humphrey Hawkins Bill, later Act, which made it the law of the land to pursue both objectives.
It also had a couple of other provisions to balance the federal budget and international trade, which have, unfortunately, been forgotten.
Humphrey Hawkins was written to require all the nation’s policymakers to have twin objectives: stable prices and high employment. Maximizing one side of this two-sided equation will result in economic chaos.
Today we have a Federal Reserve that has forgotten that message. So focused are they on inflation that they have lost sight of employment. Each time one of these corporations announces layoffs, it should remind the Fed of another side of this financial equation.
Ultimately, the Federal Reserve must follow what Humphrey-Hawkins requires: stable prices with full employment.
Sometimes the best analysts aren’t really analysts at all. Case in point. For the fifth time this year, OPEC, the Organization of Petroleum Exporting Countries, has lowered its estimate of Global Oil demand. Citing the high probability of a recession, combined with China’s continued Covid Lockdown, OPEC has reduced their daily oil demand by 100K barrels per day.
We can conclude that OPEC will likely cut its production to maintain its price. And this, in turn, will impact our price at the pump. Look for more price pressure from gasoline and other petroleum products.
Some mixed news coming from Asia last night. First, Japan reported that its economy slowed further. GDP for Japan was negative 1.3% for the third quarter, a recession level.
China reported that Industrial Production increased by 5%. That was less than analysts expected. On the other hand, Retail Sales in China declined by half a percent as those lockdowns continued to take their toll.
Here in the US, we will get the latest on Producer Prices. Wall Street expects Producer Prices to hold steady and indicate that Inflation at the Producer level is now down to slightly less than 5% per year. My estimate: Producer Prices may come in hotter than that, another surprise to the upside for inflation.