More Indications of an Incoming Earthquake

By Chase Bonenfant

9/14/22

A recent report by the Bureau of Labor Statistics on productivity and costs for the second quarter of 2022 revealed another indicator of an incoming economic earthquake. A drastic increase in unit labor cost paired with a decrease in labor productivity shows that the US work force is brittle and tired, while on the other hand, employers increasingly can’t afford them.

The report showed an increase of 10.2% on unit labor cost in the nonfarm business sector, a figure not rivaled since the first quarter of 1982. What that means is the majority of the work force, excluding the farming sector, is getting paid more money for producing less. The worker getting paid more money may sound like a good thing until you look at the fact that the 10.2% reflects an increase of only 5.7% in hourly compensation, about 3% below current inflation, meaning the worker actually got a pay cut compared to the pre-inflationary storm.

Economics 101 shows that to add an additional unit of labor (an individual worker), you need to justify it on your bottom line, showing they will increase your business’ productivity or you’ll end up wasting money. It is a difficult scenario for businesses of all sizes with the current economic conditions we face, more so for small businesses.

A year ago, companies were fighting over workers when the economy opened back up with the biggest corporations leading the charge by offering large hourly pay increases to secure the workers. It wasn’t uncommon to drive around and see “Now Hiring” signs on a few of the buildings in a shopping center or hearing about a company paying you to come to an interview. This is when the inflation surge began.

You cannot look at the inflation problem and point to one single cause of it, although, that would be nice and a lot easier to fix. The inflation problem in America, as well as around the world, is a multi-faceted issue with the 30,000 foot view pointing a finger at Globalization and the increased debarkation of self-sufficient economies. That is a larger topic, though, and one for another day.

As inflation continues to eat away at the pockets of consumers, the psychological state of the consumer, and in turn - the workforce of America, will continue to deteriorate. This can be visualized in the University of Michigan’s consumer sentiment chart. Sacrifices will need to be made in all areas of daily spending. Businesses are adapting to the conditions with more and more sales popping up of the things you want but don't need. Consumer sentiment is an aggregate expression of attitudes, feelings, values, motivations and behaviors of people within a particular market. Sentiment can be analyzed to learn why consumers feel a particular way and to predict future spending behavior, identify potential customers and create plans to build loyalty and boost engagement.

A more clear and up-to-date picture will be seen tomorrow, 9/15/22, with the release of the Initial Jobless Claims and Retail Sales report. The workforce in America is the engine of our Country and keeps the wheels turning. A workforce who is continually barraged with soaring cost of living expenditures, metaphorically starved of oil, -shown clearly on the 9/13/22 CPI report with increased food and rent cost, among other figures, can and very well may be a detriment to our economy.