Say something timeless, and it will stand the test of time. That’s what the lawyer, statesman and 16th President of the United States often did raising Abraham Lincoln to an echelon of presidents whose words will never die. Distinguishing him even from the other greats was his gift of brevity, the most famous of which was November 1863’s Gettysburg Address: “Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.” Thirteen years prior, Lincoln uttered this on the topic of life: “Leave nothing for tomorrow which can be done today.” And it was in 1838 when he said this regarding ambition and opportunity: “Towering genius disdains a beaten path. It seeks regions hitherto unexplored.” The contrarian in us pondered Abraham Lincoln misquotes. A quick search revealed: “Don’t believe everything you read on the internet just because there’s a picture with a quote next to it.” The picture, of course, is of Lincoln himself.
This moment of levity conjured the title for today’s left chart, which initially looks like the same line three times. Their recent divergence builds on an idea brought forth last week by QI amiga Philippa Dunne who shared with us her analysis that found — and we paraphrase –small business job postings are more sincere than other measures. We wholeheartedly concur. That said, we must appreciate that the bean counters at the Bureau of Labor Statistics (BLS) estimate small business job openings; there’s bound to be a margin of error. Query small business owners directly, as the National Association of Independent Business (NFIB) does monthly in its Small Business Economic Trends report, and you get a more genuine picture (purple line).
To square the disconnect between the BLS and NFIB, we checked-and-balanced it against what owners are reporting on the subjective side of hiring – the quality of candidates available to hire. We’ve taken in endless anecdata about labor shortages. The skills mismatch is, however, nothing new in a post-pandemic world; it’s just gotten exponentially worse. Fiscal policy encouraged millions to exit the workforce during which time what skills they had atrophied, leaving their resumes that much more unattractive to potential employers.
Note that the light blue line via the NFIB, which denotes a dearth of qualified applicants, has turned harder than its job openings counterpart. Through September 2021, a record 62% of small business owners reported that they had few or no qualified applicants. This coincided with the all-time peak for small business job openings, when 51% indicated they’d hung help wanted signs in their windows.
Even accounting for JOLTS’ lagged nature, the trend through December has not wavered. An even hotter idea than the much-touted JOLTS (if it bleeds, it leads) is that of the dreaded “wage spiral” — price increases emanating from higher wages. This causal phenomenon manifests when workers’ rising wages compel them to demand more goods and services, which, in turn, pushes prices even higher – a less than virtuous loop which petrifies central bankers who are old enough to remember the days when private unions had the upper hand and validated the Phillips Curve.
To be sure, the inflation genie is out of the bottle on Main Street — 22% reported inflation was their biggest concern in January. While this may not seem like an elevated reading, when converted into our favorite normalizer, the +6 z-score (deviation from the mean adjusted for volatility) clocked in December and January has no rivals over the last 35 years.
As for general inflation morphing into the insidious wage-spiral variety, four elements are required. Raising worker compensation is the first. This trend became entrenched last June with every reading since eclipsing prior 2018 records and culminating in January’s net 50% (yellow line). Ideally, paying higher wages is accompanied by charging steeper prices, which small businesses started doing last April. Since then, there’s been a positive spread of small companies raising prices relative to those increasing wages with January’s smashing high of a net 61% adopting this tactic (red line).
Substantiating wage-spiral fears requires two critical third and fourth ingredients which are conspicuously absent. Sales volume expectations (dark blue line) have stagnated, waffling around breakeven since last summer. January’s net -3% sent this series into outright contraction signaling massive uncertainty with regards to top-line prospects. The earnings outlook has also deteriorated with the percentage of small businesses reporting higher earnings downshifting from a net -5% last June to -17% by October; this depressed level was maintained through January (green line).
It’s been some time since we checked in with Paychex/IHS Markit’s Small Business Employment Watch, which collates monthly payroll data for 350,000 of the firm’s clients. While no trends are discernible, we can share that at +4.43%, year-over-year (YoY) hourly growth stayed constant at the peak hit in December; on a three-month annualized basis, this metric has been flat for three straight months. Weekly earnings, meanwhile, fell to 3.87% YoY from December’s 3.94% while that of annual weekly hours worked fell ever so slightly (-0.29%) from the end of 2021 through January.
To not misquote QI mentor, NFIB Chief Economist Bill Dunkelberg, the Fed should begin “to inoculate the economy against the inflation virus that is spreading aggressively.” With deference to “Dunk,” we dare say the Fed’s job of inoculation should have long since begun.