MNI INTERVIEW: Robust Wages Will Keep Inflation Elevated-ADP

A strong labor market with lingering worker shortages is likely to keep wage growth brisk and price pressures elevated, making it hard for the Federal Reserve to achieve a soft landing, ADP chief economist Nela Richardson told MNI.

Wage gains have moderated as the job market cools, but employment conditions remain very tight, particularly in sectors like leisure and hospitality where workers are in short supply.

“Wage growth is still way too high to be consistent with a 2% inflation target, but on the other hand it’s not strong enough to threaten a wage-price spiral. It’s going to keep, in our view, inflation higher for longer,” Richardson said in an interview.

Employment growth has slowed as 2023 progresses, but only from fiscal-stimulus-boosted levels widely seen as unsustainable. Job growth has averaged 212,000 over the last four months, about double the level seen as needed to keep up with the steady increase of the population.

“Job gains are for sure slowing, but companies are still holding onto workers. It’s a job market that’s still tight relative to normal,” Richardson said.

This is likely to make the problem of inflation more intractable over the medium term, she said. “It will be not only higher but more persistent. Maybe the plane touches down – you might hit 2% but how long are you going to stay there?”

STILL OUT OF WHACK

Some of the moderation in wage increases, which according to ADP are the lowest since 2021 but well above pre-pandemic levels, comes because a rebound in the prime age labor force and rising immigration flows have helped alleviate worker shortages.

But even that is not enough to counter trends like an aging population and post-Covid trends like remote work that gave workers increased flexibility – together with a new bargaining chip with employers.

“The number of non-working people, the growth rate is growing much faster than the growth of the overall working population. The aging of the U.S. workforce is real and labor shortages are likely to be persistent,” Richardson said.

“In that world there’s always going to be some wage pressure which means there’s also going to be the threat of inflation pressure.”

She said the conventional wisdom that retirement is a disinflationary force has been challenged by baby boomers who have continued to spend freely despite leaving the workforce.

“I see people in retirement spending on travel, they’re buying houses, they’re buying cars, they’re going to restaurants,” she said.

SOFT LANDING CHALLENGE

Richardson said a soft landing, where inflation glides gradually back toward 2% without major damage to the economy, will be hard to accomplish. (See MNI: Fed's Barkin Not Yet Convinced Inflation On Path To 2%)

“I think the Fed is going to have a challenge there,” Richardson said.

The current level of unemployment is likely too low to allow inflation pressures to completely ebb, she said, even if the natural rate of unemployment is lower than the Fed’s traditional estimate of around 5%, she said.

“Going into the next six months we’re probably not going to get too much over 4.5%,” Richardson said.

That will make the Fed’s job harder as wage growth moderates but remains robust.

“Wages will continue to slow but I’m not sure they’ll slow back to pre-pandemic levels,” she said. “The demographics that underpin global inflation have changed.”