With the lack of undocumented coming in and now the revocation of legal visas, I am starting to wonder if we might start to see wage inflation pick back up. I don’t expect to see unemployment tick up dramatically despite the government layoffs and terminations (maybe .2%).
If so, then I think it even less likely we get a rate reduction in June - or even this year. Tariffs will create mostly a one-time (maybe one-quarter) hit to inflation because it acts like a tax and it will roll-off the chart one year later (but prices will remain higher of course), but wage inflation, all else being equal, would continue and remain persistent due to our low replacement rate.
If employment remains high and wages continue to rise, that likely would create persistent inflation as well.
AI / Robotics will be here in 2-3 years (Optimus) and get progressively better. Millions of high expertise workers available to work round the clock.
They don’t need social security, pension or healthcare.
The real story is not tariffs, it is AI. Don’t blink.
As suggested in another thread, price escalation due to tariffs may dampen demand. Some of the loss of demand will be visited on foreign factories, whose products are priced out of the US market. Some of the fall in demand may offset the fall in the labor pool. It’s only April in Michigan, but it may be interesting to see if the activity of lawn care contractors in the area seems normal, going forward. The usual pace is one place or another near me, has lawn mowers roaring and blowers screaming, almost every day of the week. If I find myself blessed with quiet half of the days of the week, that would imply the lawn care companies have had to back off to visiting every two weeks, instead of weekly.
A few all-around observations, just trying to make sense of current world.
In watching employment numbers, it’s important to examine the kinds of jobs that are involved versus just the headline numbers.
For example, full-time versus part-time. Low-skill,wage versus higher-skill,wage.
We could have low unemployment and a not great economy if a lot of the incremental jobs are low skill, low wage. And higher employment with higher-skill, wage jobs would lead to a stronger economy.
Separately, the current chaos/uncertainty is slowing economic activity and weakening employment, which will counteract the low immigration effect on labor supply.
Also, the effect of tariffs per se (beyond the uncertainty effect) will slow economic activity with many higher order effects - not just the purchase of the foreign good, but the related effects on shipping and logistics providers, these goods as inputs in other economic activities, lag time or other inefficiencies in replacing a Chinese good with a substitute from another supplier, foreign retaliation on US goods and services, etc.
If the US trade deficit shrinks in a material way, this is (I speculate) negative for US asset prices (stocks, bonds, real estate) as this means the US capital surplus will decrease and foreigners will invest less in US assets. I have a difficult time seeing how this is anything but negative for US assets. Especially if the net effect overall is weakened GDP in the US and foreign economies (relative to a lower tariff scenario). We have seen the dollar weaken about 10% recently versus the euro.
We saw from Covid how long these supply chain effects can take to play out.
At current tariff rates (10% on all US partners, big % on China), I believe this will be very disruptive and take a long time to normalize to some new state.
That said, maybe the executive reverses it all soon, or there is a long grind of tribute-paying and then carve-outs given.
I believe the default position/inclination of the executive is to move to or be at higher tariff levels (relative to pre-admin), which will be counteracted by each monied interest.
Where will these two forces balance? And how long will it take?
Here’s the latest on US gdp from a survey of economists from wall street journal.
If prices jump higher (as everyone knows they will), then you can expect workers to want to increase wages (over and over the usual demands, of course). That means unions will be exerting muscle to improve contracts, and employers will have to offer better wages to attract even lower level employees.That’s a main driver of inflation, and as we have earned, it isn’t “transitory.”
Even a one time, short term shock in prices will spawn a series of secondary reactions, which is why the Fed is now worried about something they thought was behind them. Powell managed the almost impossible: the soft landing. Now somebody has thrown a cup of hot coffee in the pilot’s eyes just as the wheels were touching down - and Powell has to navigate the twin problems of unemployment and inflation all over again.
And, of course, knowing that he’s going to be thrown out on his ear in 2026, if not sooner. Lovely.
The other thing to pay attention to is - weekend versus weekday. If you begin hearing more lawn care happening on weekends and less on weekdays, that means that more homeowners are doing it themselves instead of paying someone else to do it for them.
No separate houses here. I live in a condo. A nursing home is on one side. Apartments on the other side. More condos and apartments across the street. So all grounds-keeping is done by contractors. The staff of the company that does my condo appears to be mostly USian. The company that used to do the apartments next door appeared to use migrants. Taking my walk around the 'hood, I would see the workers taking a break under a tree. All conversation was in Spanish.
I have reported that even now, more of my Mexican neighbors are going al Norte, and very few are returning.
Higher wages are an enormous incentive, and to me the “illegal laborer” game has seemed rigged for decades. If Trump and Co. were serious they would make employers liable for hiring illegal workers, but they sure as heck are not talking or acting that way.
As with so much else, Trump and Co. (including Congress) are producing a Reality Show and not reality, this show might best be titled “USAians See Terrorized Illegals Deported or Self-Deporting”, and meanwhile California agriculture and midwest meatpacking goes on just like before — with high profits.
