Bank of America’s View of the Labor Market Isn’t Really Bad

Ken Klippenstein of The Intercept has produced cutting-edge national security reporting, as well as many other materials that weren’t intended for the public.

We therefore regret having to publish this take.

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

To be fair, we can see the appeal of the story idea. Sell-side research has long reminded us of the conflicts between investor priorities and worker well-being, even if those reminders are unintended. For example, investors may find political gridlock helpful and cures for chronic diseases unprofitable.

Yet after listening to the talk of jobs and wages over the past two years, Bank of America’s rating seems downright milquetoast. The offending sections are as follows (via interception):

A further modest increase in the participation rate should help push up the unemployment rate, but we think most of the increase will likely come from weaker demand for workers. By the end of next year, we hope that the ratio of vacancies to unemployed will have reached the more normal highs of the last economic cycle. Keep a close eye on this metric and timely indicators of labor market balance like unemployment insurance claims and labor market survey questions…

wage pressures will also be difficult to reverse. Although there have been one-off increases in some pockets of the labor market, the upward pressure extends to virtually all sectors, incomes and skill levels.

In other words, they expect the ratio of job vacancies to unemployed to approach its 2018 levels by the end of 2023. They are, of course, referring to JOLTS data. There are currently 1.8 vacancies for every unemployed person, and end-2018 levels would imply 1.2 vacancies for every worker.

This confirms the point made by the think tank Employ America earlier this year: one of the main ways the Fed actually manages inflation is by cutting employment. Central bank officials raise rates, financing becomes more expensive, companies must choose between paying creditors and employees, and creditors win. People have less money to spend, so prices stop rising as much.

With that in mind, we can look at the comments of 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 unemployment at 7.5% or five years of unemployment at 6% or a year of unemployment at 10%… There are some figures that are remarkably disheartening.

One year of unemployment at 10% would mean around 33 million people out of work! 33 minutes of people who want a job! This makes Bank of America’s argument more human.

The bank is correct that there are a record number of job vacancies, and also that employment costs are rising – the US employment cost index climbed 5.1% in the second quarter of this year, according to the BLS. Excluding state and local government payroll costs, this is the fastest increase since at least 2006:

Even with all that, Deutsche Bank argues that the tight labor market adds about a full percentage point to the 9.1% annual inflation rate in the United States, citing the Chicago Fed to make its case.

By contrast, West Texas crude oil prices are up 18% this year to $88.40 a barrel, even after a significant decline from its peak above $120. Here’s what the Bank of America memo has to say about it:

Only once in a generation have economic downturns like the double-dip recession of 1980-82 or the global financial crisis of 2008-09 caused contractions in oil demand of more than 2 million bpd. To put this figure into context, Russian energy exports were around 8 million bpd before the war began, underscoring the difficulty of locking large amounts of Russian oil out of the world market.

Unfortunately, the Fed can’t do anything about Russia’s invasion of Ukraine. Bank of America’s conclusion therefore seems oddly optimistic:

There is only one major imbalance in the US economy: high inflation. It is therefore unlikely that slow growth will reveal hidden weaknesses like during the 2008-2009 recession. Also, in our view, it is easier for the Fed to manage a sharp downturn if Fed policy is the cause of the downturn. For the same reasons, we think that if there is a recession, it will probably be moderate…

In other words, the bank is arguing that a small increase in unemployment – ​​relative to job vacancies, at least – will reduce gas demand enough to keep the economy out of a slump that would drive down demand. of oil of more than 2 million barrels per year. daytime. What’s a little less bargaining power in the face of a downturn that only happens once in a generation for the second time this generation?

Larry Summers, on the other hand, seems to think the latter option is necessary – remember, the US unemployment rate peaked at 10% during the financial crisis.

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