Labor costs fell in July. That may be what the Fed’s been looking for.
Labor costs fell in July. That may be what the Fed’s been looking for.
This is a big week for economic data releases — in the days ahead, we’ll get the numbers on consumer sentiment, housing starts, retail sales and the consumer price index. The producer price index kicked off the week. As the name suggests, it measures the change in prices companies get for whatever it is they make or do.
Compared to a year ago, those prices were up just 2.2% through July — that’s down from 2.7% in June.
The story here, though, is what’s behind a whole bunch of that cooling. The price of services — as in the price of workers — declined by 0.2% on a yearly basis, the largest decline since March of last year.
Whether this is good news depends on whom you ask, said Gary Brode. He’s managing partner of the firm Deep Knowledge Investing.
“Labor costs went down, which sounds great if you’re running a business, not so great if you’re a wage earner,” Brode said.
That’s because a decline in labor costs means a decline in jobs, or wages, or both. But Brode said a little of that is a necessary evil after the pandemic economy.
“As prices went up, workers said, ‘We need to be paid more.’ As they were paid more, that made prices go up more. And so that’s where you get that wage-price spiral from,” he said.
But while it might be an uncomfortable shift for workers, it could lead to some economic relief down the line, because, as Mike Shedlock, founder of MishTalk put it, “the [Federal Reserve] will be pleased with that number.”
He said this might be the news that homebuyers and other borrowers have been hoping for. “This, I believe, will lead to the Fed cutting interest rates in September,” Shedlock said.
All of this sounds like a big deal. But don’t get too excited, said Allison Schrager, a senior fellow at the Manhattan Institute.
“It’s not totally surprising, and honestly, it might not be that meaningful,” she said.
Remember, Schrager said, we’re talking about a 0.2% decline after months of steady increases. “I don’t think it really tells us a lot about wages, particularly one month of data,” she said.
So it could be a blip. If the blip turns into a trend, she said that’s when she’ll get concerned.
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