Productivity won't help inflation

Investment Analysis Clubs Macro Economic Trends and Risks
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https://wellsfargo.bluematrix.com/links2/html/41cdcc18-2c9f-…

**Productivity Won't Offer a Painless Escape from Inflation**
**by Sarah House, Senior Economist | Wells Fargo Securities, LLC, 5/5/2022**

**Nonfarm productivity plunged at a 7.5% annualized rate in Q1, the sharpest drop in 74 years. ... The trend in unit labor costs is running more than double the Fed's inflation goal of 2%, signaling inflation pressures persist not only outside the U.S. with elevated commodity prices and still-knotted supply chains, but from within as the U.S. labor market remains exceptionally tight....**

**Productivity offers the least painful way for the economy to escape inflation. If workers are more productive, companies can afford to pay them more without pressuring profits or fueling a wage-price spiral.**

**To that end, unit labor costs, i.e., the productivity adjusted cost of labor, raced ahead at an 11.6% annualized pace in the first quarter as the tight labor market forced employers to step up compensation. ... While elevated commodity prices and supply disruptions are inflationary factors outside the Fed's control, labor costs are homegrown and signal that the Fed still has significant work to do in bringing down inflation.** [end quote]

“The Fed still has significant work to do” is a euphemism for “the Fed will need to raise interest rates much more.”

If workers are not more productive (and they aren’t), rising labor costs will either be passed on to the customer (fueling inflation) or taken out of company profits (pressuring stock prices).

Look at the charts in the article. If this continues, the pressure on the markets will continue regardless of the Fed’s actions.

Wendy

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If workers are not more productive (and they aren’t), rising labor costs will either be passed on to the customer (fueling inflation) or taken out of company profits (pressuring stock prices).

Worker productivity has been steadily increasing for 40 years, but trickle-down economics shoveled most of the gains to the top of the pyramid while working-class wages stagnated.

We’re just seeing a slight correction in that trend, and the poverty wage “job creators” are squealing.

intercst

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Worker productivity has been steadily increasing for 40 years, but trickle-down economics shoveled most of the gains to the top of the pyramid while working-class wages stagnated.

Sounds like what you’re saying is that this theory should actually be called “trickle-up economics.”

Pete

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I could care less about newbies.

I am 66 years old and facing the same dilemma that I faced in 2008-9 and again in the spring of 2020.

When to deploy the excess cash that I spent the last two years accumulating? And where? In both cases my stock positions ultimately recovered from the lowest lows and ultimately achieved new highs far above their old highs. In both cases I hesitated to pull the trigger with my excess cash until long after the markets had recovered from the lowest lows. I might as well have been 100% cash both times.

If I do that again now, will it be strike 3 in terms of proving that I really cannot time the market? My oversized cash position has is now ahead of my equity accounts over the last year. But it still lags my equities over the last two years by about 30%.

Do I wait for mungo’s famed ‘bottom indicator’ before deploying a significant amount of excess cash? Do I continue to average in following my very small addition to one of my etfs a little over a week ago?

I refuse to offer sage advice to newbies when I have yet to prove I can do anything other than buy and hold year in and year out, decade in and decade out.

As my law partner/mentor used to say, "a lesson is repeated until learned.’

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Worker productivity has been steadily increasing for 40 years, but trickle-down economics shoveled most of the gains to the top of the pyramid while working-class wages stagnated.

There are two different trends/forces that should be disentangled.

  • The globalization of the labor pool. The addition of hundreds of millions of workers to the global labor pool in developing countries (Mexico, China, India, etc.) has put downward pressure on wages, working-class wages in particular.
  • Productivity increases have enabled high-wage countries to produce more per worker and to compete with lower labor cost countries.

DB2

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I refuse to offer sage advice to newbies when I have yet to prove I can do anything other than buy and hold year in and year out, decade in and decade out.

That in itself may be good advice for many.

DB2

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Sounds like what you’re saying is that this theory should actually be called “trickle-up economics.”

Call it what you wish, it’s the work of the Power Law Distribution. Most to the few, the remainder to the many.

The Captain

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I don’t think productivity has anything to do with the current inflation rate, or offers any solution to the current inflation rate, because the inflation is due to an attitude of, rather than settling for a fair profit, “JCs” are gouging the daylights out of their customers.

I posted a while back about the Audi Q3, with a sticker of $45,100, that the dealer was demanding over $69,000 for. The local news ran a piece a few weeks ago, car models that dealers are demanding $8-$10,000 over sticker for.

The “JCs” will gladly lecture everyone on “supply and demand”, (funny how they like that law for selling their stuff, but not when it comes to trying to hire someone), but do they give a moment’s consideration to resentment their customers will harbor, for being bent over and rogered so hard?

Steve

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I don’t think productivity has anything to do with the current inflation rate, or offers any solution to the current inflation rate, because the inflation is due to an attitude of, rather than settling for a fair profit, “JCs” are gouging the daylights out of their customers.

That’s an interesting position to take. Of course, it does ignore things such as large increases in money supply, government spending, Covid disruptions in China, Russian embargoes, Ukrainian wheat and fertilizer disruptions or that 1800+ container ships are stuck in/out of port.
www.china-briefing.com/news/china-coronavirus-updates-latest…

DB2

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Of course, it does ignore things such as large increases in money supply, government spending, Covid disruptions in China, Russian embargoes, Ukrainian wheat and fertilizer disruptions or that 1800+ container ships are stuck in/out of port.

That is the “supply and demand” argument, that is used to justify increasing prices to a “market clearing” level. If a car dealer can make a profit at the sticker price of a car, why charge $10,000 or $20,000 extra, other than bald faced greed?

Steve…does not enjoy paying profiteering prices for things

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Power Law Distribution

https://en.wikipedia.org/wiki/Power_law

Y’all are welcome. :wink:

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iampops5: I refuse to offer sage advice to newbies when I have yet to prove I can do anything other than buy and hold year in and year out, decade in and decade out.

I can’t give advice to anyone. I am currently ~3-4% cash, rest tied up in (Canadian Only) dividend (at least 4%) payers. I think of it as my Roman Gladiator strategy! }};-D

Works for me … far better than I deserve.

Tim

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That is the “supply and demand” argument, that is used to justify increasing prices to a “market clearing” level. If a car dealer can make a profit at the sticker price of a car, why charge $10,000 or $20,000 extra, other than bald faced greed?

But that’s the essential problem! If a Ford dealer has one F-150 and has 3 customers looking at it who want to buy it, which of the 3 customers should get it?

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But that’s the essential problem! If a Ford dealer has one F-150 and has 3 customers looking at it who want to buy it, which of the 3 customers should get it?

First one in the door? Lottery? Plenty of alternatives to bending them over and giving them the boinking of their life.

Thought occurred to me the other day: how much of the opportunity for dealers to gouge people is the result of leasing? If a lease contract buy-out option is not favorable to the customer, or does not have a buyout clause at all, then people are forced to koff up for a new car, regardless of price, because the lease company is taking their old ride away.

How Does the Inventory Shortage Impact Leasing?

The percentage of consumers that are leasing their vehicles has dropped due to the inventory shortage. In December 2021, only 20% of new-car shoppers leased a vehicle, compared to December 2019, when 30% chose to lease, according to Jominy.

https://www.cars.com/articles/how-does-the-inventory-shortag…

Car leaseholder struggles to exercise buyout agreement terms
Due to low inventory, some dealerships refuse to honor buyout agreements

https://www.wptv.com/money/consumer/car-leaseholder-struggle…

So 30% of cars sold in 2019 were on a lease. Those cars are now coming off lease. Dealers are demanding thousands more for a buyout than the stated residual in the lease contract, or refusing to honor the buyout provision at all.

Don’t the dealers consider their customers might resent the rogering they are getting? Or do they think they are entitled to every dollar they can extort from their customers?

Steve

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First one in the door?

I see! You’re in favor of the guy that provides “first in door” service to get the extra $10k rather than the dealer. I suppose that makes sense … creates another ‘job’ too.

Lottery?

Ah, then everyone enterprising enters the lottery and the winner resells the car to the people who really need it the next day … for a feee of $10k. Again, someone else gets that $10k instead of the dealer, but the buyer still pays it.

Thought occurred to me the other day: how much of the opportunity for dealers to gouge people is the result of leasing? If a lease contract buy-out option is not favorable to the customer, or does not have a buyout clause at all, then people are forced to koff up for a new car, regardless of price, because the lease company is taking their old ride away.

Some leasing companies are removing the buyout clause, or making it very difficult to use. I will predict that they may eventually regret doing that. Especially for new 3-year and 4-year leases. Because very often following scarcity, there is glut. And what will happen in 3-4 years, if there is indeed a glut of “pff lease” cars, in the absence of a buyout clause (with a dollar amount attached), they will need to negotiate each one, and give some good sweeteners to entice the people to buyout.

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If a car dealer can make a profit at the sticker price of a car, why charge $10,000 or $20,000 extra, other than bald faced greed?

But that’s the essential problem! If a Ford dealer has one F-150 and has 3 customers looking at
it who want to buy it, which of the 3 customers should get it?

Obviously the customer who’s willing and able to pay the most the most for it.

That’s why “rich” people who can afford the “good” cars and the “good” houses at the top of the hill so as to look down on the “poor” people who can’t afford the “good” houses and live at the bottom of the hill.

I’m not a religious guy, but to quote some famous guy “The poor you will always have with you.”

Desert Dave
(Who worked hard to buy/pay off a house halfway up the hill.)

PS “bald faced greed” only works if the customer is willing to pay for it. Otherwise the greedy are forced to lower their price or live with whatever it is.

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Some leasing companies are removing the buyout clause, or making it very difficult to use. I will predict that they may eventually regret doing that. Especially for new 3-year and 4-year leases. Because very often following scarcity, there is glut. And what will happen in 3-4 years, if there is indeed a glut of “pff lease” cars, in the absence of a buyout clause (with a dollar amount attached), they will need to negotiate each one, and give some good sweeteners to entice the people to buyout.

Auto industry management is, increasingly, saying they are all about raising prices, and they don’t care if they lose volume in the process. The big three have been closing factories for years as they cherry pick the most profitable segments of the market.

Stellantis is now pushing dealers to build a separate Jeep showroom, to separate that brand from the mundane Dodge/Chrysler/Ram line, as they escalate Jeep prices.

Jeep Trick: Top Brass Advocate for Separate Jeep Showrooms

With the house of Stellantis constantly exploring the upper echelons of what customers will pay for a rig with a Jeep badge on its nose, it seems that placing six-figure Grand Wagoneer L models next to entry-level Ram work trucks has become passé. If some corner-office dwellers have their way, Jeeps – or at least the snazzy ones – could earn a place in their own showroom.

https://www.thetruthaboutcars.com/2022/05/jeep-trick-top-bra…

The CFO of Volkswagen says they plan to drop 60% of their existing products, all the lower priced ones, as they escalate prices.

VW to scrap models and focus on premium market -CFO tells FT

“The key target is not growth,” Arno Antlitz told the Financial Times newspaper. “We are (more focused) on quality and on margins, rather than on volume and market share.”

https://www.reuters.com/business/autos-transportation/vw-scr…

I have been seeing some laffable choices as they try to get people to pay Audi prices for VWs. If you option a Taos up to SEL trim, with AWD and a pano roof, you are well over $30,000, within spitting distance of an equal sized Audi. The Taos has an illuminated grill, and “15 color ambient lighting” in the interior. But a light in the glove box, lights in the footwells, light in the switch for the dome light so you can find the switch? Nope, they can’t do that for $36,000. My base trim $21,000 Jetta wagon has those convenience lights, but they don’t provide them anymore, in spite of the price escalation.

Ford was boasting last year of their success in escalating prices, pushing their ATP over $50,000 one month. With the demise of the Ecosport, if you walk in to a Ford store now, the cheapest non-pickup is the Escape, which starts at $26,500.

This has the smell of the arrogance we saw among corporate managements in the 80s, as they pounded their customers with extra fees and charges.

As the big three close plants and tighten supply, what are they going to do to prevent someone coming in at the low end and eating their lunch? A return of the “voluntary import restraints” we saw in the 80s, but also applied to the foreign brand cars built in the US, to protect the market for big three greed?

Steve

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As the big three close plants and tighten supply, what are they going to do to prevent someone coming in at the low end and eating their lunch? A return of the “voluntary import restraints” we saw in the 80s, but also applied to the foreign brand cars built in the US, to protect the market for big three greed?

No doubt there’s a big opportunity for the Asian car companies on the low-end.

intercst

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No doubt there’s a big opportunity for the Asian car companies on the low-end.

Several Chinese companies were on the brink of entering the US market. They had been displaying their models at the Detroit show for several years.

Then the trade war with China started.

Steve

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As the big three close plants and tighten supply, what are they going to do to prevent someone coming in at the low end and eating their lunch? A return of the “voluntary import restraints” we saw in the 80s, but also applied to the foreign brand cars built in the US, to protect the market for big three greed?

Nobody is going to “come in” at the low end unless they can make money doing so. The reason the existing large automakers are abandoning the low-end is because it isn’t profitable (mainly because a lot of bells and whistles are expected, and some are even required by law, in low end models as well as high end models). This will go double for EVs when they finally appear en masse. A 70kWh battery in a low-end car costs a heck of lot, and only a little less than the 82kWh battery in the high-end car.

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