“Inflation is coming down in the US, but not for good reason!”

In today’s edition, we focus on the US Labor Cost Index (click to download this week’s MacroChartmania, which features over 100 charts used to chart the latest macroeconomic and stock market developments. All data come from Macrobond and are updated weekly). There is something fascinating about interpreting stock market events and stock market forecasts. According to observers and analysts, the bearish episode we have been experiencing since the beginning of the year is due to inflation, the rise in interest rates and the recession.

The markets, on the other hand, are quite optimistic about 2023. Analysts expect a slowdown in inflation, which will remain tenacious in any case. They expect a mild recession, hitting developed economies the hardest, and believe central banks will hike rates a bit more (probably until early Q2), before stalling until the end of the year. Surely it is still too early to know the extent of the recession and whether the United States will be able to avoid it. This is a debate that divides economists.


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But there are signs of a decline in inflation, at least in the United States. This is not the case in the UK, where the consumer price index (CPI) rose by 11.1% in October, for example. In the US, rising wages, reflecting Covid-induced imbalances, labor shortages and labor market tensions, partly explained the rise in prices. This trend is reversing. In recent weeks, several major tech players have announced large layoff plans (Metal, Stripe, PayPal, Microsoft, Amazon, etc.). But these waves of layoffs aren’t just for this industry. Layoff plans have been announced in other sectors of the economy, including real estate developer Redfin and truck builder CH Robinson.

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To understand this sudden wave of layoffs, one must first understand the sequence of the economy. We know that employment is a lagging indicator. In the past, we’ve seen layoff plans arrive several months after the economy entered a recession (layoffs began eight months after the 1974 recession officially began, for example).


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But some sectors of the economy are more sensitive than others to rising interest rates, which helps to know ahead of time whether or not there will be waves of layoffs. This is especially true for the housing market (the housing market is often said to be the business cycle in the US). In a context marked by the slowdown in the real estate market since the beginning of 2022, the consumption of goods linked to real estate purchases also decreased, with a certain delay. This is the case with household appliances, do-it-yourself tools, etc. The housing market slowdown is spreading to the rest of the economy. This puts pressure on expensive durable goods and thus the industry that transports and delivers these goods to all corners of the world. This situation explains why CH Robinson laid off 650 employees a week ago. We believe this is just the beginning.

The coming waves of layoffs mean that the slowdown in wage growth, which has already begun, will become more pronounced in the coming months. In the chart below, we have represented the National Federation of Independent Business (NFIB) compensation plans and the Employment Cost Index. Only 23% of small businesses plan to increase wages in the next three months. This is significantly less than a few months ago, when 32% were considering a pay raise. Wage policies in small businesses tend to raise wages.


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As a result, we can expect the Labor Cost Index, which has started to decline recently, to continue its decline, likely to well below 4% as we approach 2023. Going forward, this could ease inflationary pressures and get the Fed to slow the pace of interest rate hikes. This is what Fed Vice Chair Lael Brainard hinted at this week: “It will probably make more sense to slow the pace of rate hikes soon.”

Saxo Bank (with MacroBond)

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