The US labour market is heating up.
The recent monthly Jobs Openings and Labor Turnover Suvey (JOLTS) showed that job openings are at 6.7 million for June.
A strong job market could mean that wage growth starts picking up…
…Which could also mean more interest rate hikes.
To stave off the 2008 crisis, the US Federal Reserve lowered interest rates to record lows. Now the Fed is slowly increasing rates to normalise the economy.
The Fed has already raised rates twice this year and is looking at two more increases by the end of the year.
The thing is, inflation is starting to pick up too. The US inflation rate increased to 2.9% in June. That’s the highest since 2012.
Why has inflation remained so low?
Well for years inflation has remained low. Now it looks like it is gaining some momentum. So far, the increases in inflation have been within expectations. Yet the danger is that inflation gets out of control.
If inflation starts rising at a faster pace, the US Federal Reserve may raise rates quicker than expected.
I have often asked myself why inflation has remained so low in the US economy.
It is one of the reasons why I was keen to hear Jonathan Pain speak recently. He was one of the speakers at Port Phillip Publishing’s ‘Paradox of Prosperity: How to Navigate Your Wealth Through the Perils and Opportunities of the Second Gilded Age’ summit.
This exclusive investment summit took place in April this year, in Melbourne.
What do we mean by ‘paradox of prosperity’?
Well, the world is in massive amounts of debt, and debt has been increasing fast in recent years because of cheap credit.
Debt has created a lot of prosperity, and confidence. Yet what happens when there is a loss in that confidence?
For that, back to Jonathan.
Jonathan is the author and publisher of The Pain Report and director of JP Consulting NSW Pty Ltd.
His presentation was titled ‘Brace Yourself for Global Inflation Shock’.
The first thing Jonathan showed us was this chart. It shows the consensus forecast for consumer inflation for major economies around the world compiled by Bloomberg earlier this year.
Source: The Pain Report
As you can see, the forecasted numbers are quite low. Meaning the majority of leading economists don’t expect inflation to surge much this year or even next year.
But as Jonathan said, he believes that every number on this table is ‘hopelessly wrong and hopelessly low ’.
As he continued:
‘This is the story I’m going to tell you today that the consensus expectation from the 59 brightest invest economist of the world’s greatest financial institutions are simply extrapolating into the future in a neat, elegant and linear fashion, in a very much horizontal extrapolation, that inflation is the least of our concerns in 2018 and next year.
‘I, in fact believe that the great shock for this year and next, the catalyst, the primary catalyst that could unravel much of the complacency that we have seen evident in the markets is indeed a surprising surge in inflation.’
Are we, as Jonathan said, at ‘the mother of all inflationary crossroads’?
Jonathan could very well be right.
The economy is running hot. Unemployment in the US is at record lows. GDP has just jumped up to 4.1% in the second quarter of 2018.
Core inflation, which is the preferred method to measure inflation for the Fed, has recently jumped up quickly.
The strong labour market is already putting upward pressure on wages.
The National Federation of Independent Business (NFIB) surveys small businesses in the US. In their most recent jobs report they noted:
‘The tight labor market continues to be the biggest problem facing small businesses, with 37 percent of owners reporting job openings they could not fill in the current period, a new survey high. Up one point from June, 13 percent of owners reported using temporary workers to compete in the tight labor market […]
‘The July jobs report shows the magnitude of small businesses that are growing and hiring at record levels, creating new jobs and opportunities for the workforce, and offering employees higher compensation,” said NFIB President and CEO Juanita D. Duggan. […]
“Small business owners are continuing to show that they’re looking to hire and willing to pay more to hire the right employees,” said NFIB Chief Economist Bill Dunkelberg.’
Small business owners are already planning to increase wage compensation to levels as they cannot find qualified workers.
Adding fuel to the fire are the recent US tax break, increasing oil prices, and the trade war, which are all inflationary.
What could high inflation in the US mean for the global economy?
The Fed is putting an end to years of stimulus with low interest rates and quantitative easing. It is trying to get the balance ‘just right’. But there has been a lot of fuel added to the economy.
This higher growth could very well translate into higher inflation. The problem is that inflation can be hard to control.
A sudden spike in inflation in the US could mean the Fed starts tightening faster than expected, which could trigger a recession. A recession in the US would have repercussions all over the world.
The last subprime crisis caused one of the biggest economic downturns since The Great Depression. Since then, the recovery has been weak.
Many of us here at Port Phillip Publishing are quite concerned. What will the next recession look like?
Some of us think the next one could be worse, much worse.
That’s why we built a whole investment summit around this ‘paradox of prosperity’. To help us understand it and prepare for what is yet to come.
The summit happened back in April this year. You may have missed it, but we had a professional crew record the whole thing. Which means, you can still access the recordings and listen to every idea, warning and discussion that took place.
To claim your ‘virtual seat’ click here.
Editor, Markets & Money