Jan Hatzius: Labor Market Slack and its 2 Implications

In a recent note at Goldman, Jan Hatzius cites a major trend from the last few years that’s likely to continue – labor market slack.  Of course, this has a broad impact on many facets of the economy.  In particular, corporations and consumer spending.   It’s a strange sort of environment we’re in because consumers are just strong enough to keep spending at a modest level, but not strong enough to spend at a rate that causes very high inflation.  And this puts corporations in the driver’s seat.  They can maintain a steady revenue flow and manage their largest expenses (their employees) at a rate that isn’t overly onerous on margins.  In other words, the capitalists are beating the labor class.

Anyhow, Hatzius cites these two major implications in the note saying that continued slack in the labor market will do two things:

  • It will keep corporate margins high and possibly even rising.
  • It will keep inflation low.

Of course, the margin expansion story is contingent on more than just the expense side.  And that’s where things get a bit more dicey.  Corporate revenues are slowing to the mid-single digits and perhaps even lower.  See the chart below for the big picture there.  That doesn’t mean margins have to decline, but it does mean the labor market is likely to remain weak.  In other words, the capitalists win again.

Chart via Orcam Financial Group:


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Alex H

    Where is the data source for US corporate revenues?

  • Steve W

    Can we say it really is (a little) different this time — at least for U.S. investors whose personal frame of reference goes back to no more than 50 or 60 years?

    Interest rates at or near historic lows, umemployment still close to 8%, households still delevering, the nation’s auto fleet is older than ever, the euro countries still struggling with a flawed currency system, rail freight numbers still (somehow) suggesting very modest economic growth, gasoline heading back to $4 per gallon, and the S&P 500 and DJIA at multi-year highs. We live in interesting times.

    Wait until the PPACA (Obamacare) officially kicks in (when all the exchanges open and many existing insurance plans get changed to meet the new requirements). Don’t be suprised when it gets harder to see your primary care physician. You’ll probably see a nurse practioner or physician’s assistant sooner. Can’t guess (at this point) how it will impact the economy.

  • Geoff

    It seems like everyone takes “labor mkt slack” for granted. Perhaps it’s time to be a contrarian?

  • CharlesD

    Cullen I am surprised you would make these comments. You
    are one of the few investors who understand the Kalecki, etc.
    equations for profits. As you know, simplifying a bit, Profits =
    net investment + net exports + consumer spending (in excess of wages)
    + government deficits. And, as you also know, profit margins are high
    because of size of the deficits – which have increased revenues
    without increasing cost. Labor costs have nothing to do
    with profits – since higher or lower labor costs result in higher
    or lower revenues as well (assuming the income is spent). “What is true at the micro level (lower costs lead to higher profits) is not necessarily valid at the macro level”. In economics this is known as the Fallacy of Composition, with which I think you are familiar.

  • Syd

    Thanks for highlighting this Cullen. It shows how capitalists, the wealthy, investors, and corporate executives benefit from a slack labor market, i.e., high unemployment. They have incentives to keep it that way. It may turn out to be short-sighted to have this kind of economy, but time will tell. It’s not good for the majority, but it persists.

    Though “labor” is the vast majority, and capitalists are a minority, politicians haven’t done much other than talk about how focused they are on jobs. What the government should do is a matter of values, opinion, and pragmatism, but I’m glad that raising the minimum wage is on the table.