#CKStrong

What is the Fed thinking?

Getting back to the pre-COVID unemployment rate of 3.5 percent after the rules of the game and economic incentives have changed is a pipe dream, in our view.

It’s clear the labor supply curve has shifted left.

Isn’t that evident with 32.2 percent of the unrecovered jobs in the leisure and hospitality sector yet no workers can be found? Moreover, 62.2 percent of unrecovered jobs are in three sectors: leisure and hospitality, government, and education and healthcare. None lack for demand.

Next month will be a test for the labor market as the extraordinary COVID unemployment benefits roll off. Will the government allow them to fade, however?

Demand ain’t the problem, folks.

Maybe higher wages will attract more workers, which we are always rooting for but higher real incomes are only sustainable with productivity gains and/or changes in relative prices with respect to each sector.

Trying to monetize a supply shock only exasperates the problem. Ask the global supply chain, where almost hyperinflationary expectations rule the day.

Nevertheless, kudos to the policymakers for keeping the global economy out of recession but a big fail for maintaining the extraordinary policy measures way beyond their useful life, which are now becoming deleterious to producers.

Price pressures remained intense during July, with rates of both input cost and output charge inflation among the steepest in the survey history. Part of the increase in input prices reflected the ongoing disruption across global supply chains. Increased costs were passed on to clients in the form of higher charges. Rates of increase in both price measures were steeper at manufacturers than service providers. – Global Composite PMI, July 2021