Tension is rising, including in the US labor market

According to the US JOLTs (Job Openings and Labor Turnover) report for July, tension in the US labor market continues to increase. The number of vacancies increased by almost three quarters of a million to 10,9 million.

That is a record in absolute numbers and, as the first picture shows, it is also a record when vacancies are expressed as a percentage of total employment. In the Netherlands we were recently excited about the fact that the number of vacancies with us now exceeds the number of job seekers. In the US, the number of vacancies has exceeded the number of unemployed for several months and the gap is widening. In July there were 8,7 million unemployed and, as mentioned, 10,9 million vacancies.

This tension in the labor market raises the question of whether this will lead to an acceleration of wage growth. So far this is not too bad (or against, if you will). What we are experiencing now is unique, which means that we have no reference to past experiences. Logic says that sharply increased tension in the labor market leads to a large wage increase. Whether that actually happens and how long it will take before that happens, we do not know. We can do nothing better than looking at the numbers and listening to anecdotes.

Wage increases slightly
The Atlanta Fed publishes wage growth figures. Economists often follow their 'wage growth tracker', a measure that indicates the median wage growth of individuals over the past 12 months. Because of the latter alone, there is a delay in these figures. Anyway, this measure showed a 3,6% year-on-year increase in July, after which wage growth accelerated to 3,9% in August. The next picture shows that we have thus reached the upper end of the band in which the wage increase has been for years. In an explanation, the Atlanta Fed writes that if you look at weekly figures, the growth rate has now increased to 4,4%. I don't think we should lose sleep over that, but it's something to keep an eye on. Many economists think this will all work out. Personally, I'm less convinced of that. The reason is that I think it's quite logical that more demand than supply leads to price increases (in this case, wage increases).

In the slurry that the Atlanta Fed produces in this area, we can also look at all kinds of different groups. While browsing through the numbers, I noticed the following chart. The wage increase of young people is on the rise. Their wage growth declined the most after the outbreak of the pandemic, but things have improved much in recent months. That seems like a good thing to me. The age category to which I belong - I fall quite well into the 55+ group - must be satisfied with less. As a generation, however, we should certainly not complain about how our economic life has turned out (until now).

German industry orders increase lead over production
German companies in the manufacturing sector saw their order books increase strongly again in July: 3,4% compared to June, when orders also increased by 4,6% month-on-month. The year-on-year increase of 24,7% is obviously flattered by last year's deep recession. Compared to July 2019, an increase of 16,8% was recorded. That's robust.

It wants to run less smoothly with production. Due to supply problems, especially in the automotive sector, which is important for Germany, production is therefore lagging sharply. Production was 1,1% more in July than in June, but the year-on-year comparison is moderate at +6,3%. Compared to July 2019, the production level was 5,5% lower.

The next 2 pictures clearly show the difference between orders and production. The second picture shows that orders are more ahead of production than at any time in the last 20 years. Carsten Brzeski, head of macro research at ING, likens the situation to a glass bottle of tomato ketchup. Nowadays, ketchup is usually in plastic and you can squeeze it. This is not possible with glass bottles. Due to the thickness of the substance, it always takes a while before the ketchup comes out of the bottle. Not infrequently, a large quantity arrives at once. He also foresees this for the production of German industrial companies. I think he's right, but I would add that it's also possible that dried ketchup bits settle in the bottle neck and still thwart the flow of ketchup.

Power mechanical engineering is a sign of great willingness to invest
In contrast to that in Germany, the Dutch industry is doing very well. For July, CBS reported an increase in average daily production of 1,3% compared to June, an increase of 14,1% compared to July 2020 and 9% compared to July 2019. The performance of the mechanical engineering. Average daily production in that sector was 68% higher in July than twelve months previously. Of course that is flattered. But compared to July 2019, the average daily production in mechanical engineering was also 53% higher. It is a sign that the willingness of companies to invest worldwide is high. Given the logistical disruptions in the world, the increase in production in mechanical engineering is all the more impressive.

Inflation in our country rose to 2,4% in August, from 1,4% in July. The increase was partly a base effect: prices fell in August last year. The month-on-month increase this year was 0,4%, slightly less than the 0,5% in July. However, inflation figures are currently quite distorted by the course of the pandemic. For example, the prices of holiday package holidays rose by more than 16% compared to a year earlier and the prices of holiday parks by 12%. But that had everything to do with the price cuts that were implemented last year to attract customers.

Rents barely rose. Rents and rents imputed to homeowners make up approximately 23% of the inflation basket. Rents, including those in the free sector, have been restricted by legislation for 3 years. This will limit the inflation figures in our country for the next 3 years. I find this very funny. Apologies if I've written this before, but the ECB is doing all kinds of antics to boost inflation and in the Netherlands we are taking measures that actually keep inflation down. Nice policy coordination!

ECB to 'recalibrate'
Incidentally, the press conference of ECB president Christine Lagarde et al. yesterday was a little less cringingly boring than usual. The ECB is cutting monthly purchases under the Pandemic Emergency Purchase Programme. In the US they would call it 'tapering', but Lagarde likes to "recalibrate".

The ECB thinks the higher inflation is temporary and they have been thinking that in Frankfurt for quite some time… They have, however, raised their inflation estimates for this year, next year and even those for 2023, albeit only within the margin of rounding differences. The longer inflation remains high, the greater the chance of so-called 'second-round effects', ie wage growth will also pick up and develop a self-sustaining process. If that brings inflation to around 2% in the medium term, there is nothing to worry about, but otherwise....

Opposing signals from China
While there are quite a few signs that the Chinese economy is currently slowing down (industrial production, private consumption, lending, etc.), foreign trade data remains strong. In August, China's exports (in current dollars and therefore nominal values) were 25,6% more than a year earlier. August 2020 was not a weak export month, so there is definitely a lot of momentum here. The import value in August was no less than 33,1% higher than a year earlier (+28,1% in July), which is not bad either. Nevertheless, I expect the growth rate in China to continue to decline in the coming period. The Xi administration's policies currently seem more focused on reducing income disparities than on supporting economic growth. And the delta variant still seems to pose a significant problem in China.

Balance
On balance, the global economy is still doing quite well. The delta variant, the Chinese slowdown and the logistical disruptions are uncertainties, but the momentum is still quite okay. Despite obvious supply problems in German industry, customers continue to place orders there. And the explosion of production in Dutch mechanical engineering suggests that companies worldwide are still investing heavily.

The uncertainties surrounding inflation remain. In the US, the labor market is gradually tightening and wage growth now also appears to be accelerating in the statistics, albeit only slightly.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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