The Bank of America’s view of the job market isn’t actually bad

Ken Klippenstein of The Intercept did some cutting-edge national security reporting, along with several other documents that weren’t intended to reach the public.

So we regret having to publish this shot.

But it seems useful to clarify that there is no real scandal in the so-called Bank of America private note published last Friday by the outlet supported by Pierre Omidyar. First, the memo was actually a research note, and those notes are being distributed to thousands of customers.

To be honest, we can see the appeal of the idea of ​​the story. Sell-side research has long reminded us of the conflicts between investor priorities and worker well-being, even if such reminders are not intentional. Investors may find political congestion and treatment for chronic illnesses unprofitable, for example.

However, after hearing the discussion about jobs and wages over the past couple of years, the Bank of America note looks decidedly milquetoast. The offending sections are as follows (via Interception):

A further modest increase in the participation rate should help push the unemployment rate up, but we believe that most of the increase will likely come from weaker demand for workers. By the end of next year, we hope that the ratio of job openings to unemployed will drop to the most normal highs of the last economic cycle. Keep an eye on this metric and timely indicators of labor market balance, such as jobless claims and job market survey questions. ..

wage pressures will also be difficult to reverse. While there may have been some one-off hikes in some pockets of the labor market, the upward pressure extends to virtually every sector, income and skill level. “

In other words, they hope that the ratio of job openings to unemployed is closer to 2018 levels by the end of 2023. They are referring to JOLTS data, of course. There are currently 1.8 openings for every unemployed worker and the levels at the end of 2018 would imply 1.2 job openings for every worker.

This brings home the point the Employ America pundit made earlier this year: One of the primary ways the Fed actually manages inflation is by reducing employment. Central bank officials raise rates, financing becomes more expensive, companies have to choose between paying creditors and employees, and creditors win. People have less money to spend, so prices stop rising that much.

In this light we can look at comments from Larry Summers, who said the following in a June speech, according to a Bloomberg report:

We need five years of unemployment above 5% to contain inflation, in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment. %. . . There are remarkably daunting numbers.

A year with 10% unemployment would mean roughly 33 minutes 16 million people out of work! 33 minutes 16 million people who want a job! [Corrected: Our toddlers and grandparents aren’t looking for jobs. Yet.] This makes the Bank of America argument humane.

The bank is correct in saying that there is a record number of job openings and also corrects that labor costs are rising: the US labor cost index rose 5.1% in the second quarter of this year, according to the BLS. Excluding state and local government labor costs, it has been the fastest increase since at least 2006:

Despite all of this, Deutsche Bank argues that labor market rigidity is adding about a percentage point to the US’s 9.1% annual inflation rate, citing the Chicago Fed to back up its argument.

In contrast, West Texas crude oil prices rose 18% this year to $ 88.40 a barrel, even after a significant drop from the peak above $ 120. Here’s what the Bank of America note has to say about it:

Only once in a generation did economic downturns such as the double recession of 1980-82 or the global financial crisis of 2008-2009 lead to contractions in oil demand of more than 2 million barrels per day. To put this number into context, Russian energy exports were around 8 million barrels per day before the war began, underscoring the difficulty of blocking large quantities of Russian oil from the global market.

Unfortunately, the Fed cannot do anything about the Russian invasion of Ukraine. So Bank of America’s conclusion sounds strangely promising:

There is only one major imbalance in the US economy: high inflation. So slow growth is unlikely to reveal some hidden weaknesses like in the 2008-2009 recession. Also, in our view, it is easier for the Fed to handle a sharp slowdown if Fed policy is the cause of the slowdown. For the same reasons, we think that if there is a recession, it will likely be mild …

In other words, the bank argues that a small increase in unemployment, at least compared to job opening, will reduce demand for gas enough to keep the economy out of a crisis that would reduce oil demand by more than 2 million. barrels per day. What is one less bargaining power than a decline that occurs once in a generation for the second time in this generation?

Larry Summers, on the other hand, seems to think the latter option is necessary: ​​remember, the unemployment rate in the United States peaked at 10% during the financial crisis.

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