MainStreet Macro: Peak or Plateau?

One of my family’s favorite pastimes is playing board games. Our faves include chess (which my teenage boys dominate), Scrabble (my husband’s the GOAT on this one) and Monopoly (the most frequent victor is me, obviously).

But not all games are quite so fun. My least favorite, when it comes to the economy, are guessing games.

Wall Street right now is in the midst of a guessing game on key economic data. I call this game “peak or plateau”.

This week, we examine three elements of the economy to determine if we’re at a peak or a plateau.

Inflation

Last week, data showed that the rate of inflation slowed a bit in April, to 8.3 percent from 8.5 percent in March.

This slowdown in headline inflation was pretty much expected. Prices had gone up so much already that it wasn’t a stretch to call a peak this month compared to where prices were a year ago.

But core inflation, which strips out more volatile components such as gasoline and food, did surprise the markets. It rose 0.6 percent from the previous month.

That’s a lot. Market commentators expected a peak, but there also are reasons to see a plateau on the horizon at this elevated level.

One reason is that price pressures are spreading beyond supply-constrained goods production into services, too. That means easing supply-chain logjams won’t fix everything that’s driving inflation.

Another driver is shelter costs. The median cost of a home is up 15 percent from a year ago. The cost of both homes for sale and homes for rent are likely to push inflation higher well into the future, due to a shortage of housing that’s persisted for about a decade and has been made worse by the pandemic.

Even if inflation has peaked, a plateau at this level can’t be ruled out.

Labor shortages

Adding to inflation concerns are labor shortages. Many employers are still zealously trying to increase their head count and workers, it seems, are still hesitant to commit.

The labor force participation rate is down more than a percentage point from its pre-pandemic level of 63.4 percent. It also slipped a bit in April, to 62.2 percent from 62.4 percent in March.

As any economist worth his widgets will tell you, one month doesn’t mean a trend. But the rate has been stuck at around this level since January of this year. I would call that a plateau.

Despite labor shortages, workers aren’t coming out ahead, thanks to inflation. Real wages, or wages adjusted for inflation, fell 2.6 percent in April, similar to the decline in March – another plateau.

Gender pay gaps

Finally, while Wall Street might not be laser-focused on gender pay equity, workers certainly are.

The ADP Research Institute’s recently released People at Work global survey found that 7 in 10 U.S.-based employees would consider leaving their jobs if their companies had gender-biased pay policies.

New research from ADPRI shows, that the gender pay gap narrowed during the pandemic.  Women now make 83 percent of what men make, up from 80 percent in 2019.

As we’ve noted in the past, however, these pay gains come at an enormous cost to women. 

Women made up 46 percent of the workforce prior to the pandemic, but bore 53 percent of the pandemic-induced job losses. Most of the jobs lost were in the low-paying service sector where women appear in greater numbers than in other sectors. The loss of these low-paying jobs make overall wage levels higher for women.

But there’s some good news that suggests the gender pay gap will continue to narrow. In two industries where pandemic job losses weren’t as steep, we did see improvement.

The gender pay gap in manufacturing narrowed to 93 percent from 86 percent in 2019. The gap in the trade sector closed too, to 86 percent from 80 percent.

My Take

Peaks and plateaus don’t last forever. Eventually inflation will fall, shortages will ease and pay gaps, even those with long-lived historical roots, will narrow.  The question is when – and that’s anybody’s guess.