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Pumpkin Spice Economics: Breaking Down What You’re Seeing With Labor Markets and Inflation

Published on October 4, 2021

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

As we enter fall, Jonathan Clements and Peter Mallouk discuss what’s going on with the labor markets, inflation (again), and how Federal Reserve policy could impact both. Plus, their monthly tips include year-end considerations for your retirement accounts.

To read and hear more about inflation

To learn more about the “backdoor” Roth strategy

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Email us @ podcasts@creativeplanning.com


Jonathan Clements: Hi. This is Jonathan Clements, Director of Financial Education for Creative Planning, headquartered in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle. We’re three quarters of the way through 2021. Stocks are up, bonds are struggling, inflation is higher, and it’s still difficult to get a restaurant reservation. I know this is a first world problem, but here in Philadelphia where I live, there are restaurants that only open five days a week because they can’t find enough workers. Peter, what’s going on with the labor market?

Peter Mallouk: It’s very interesting because in a normal world, and we’ve talked about inflation a few times before. In a normal world, when there’s more demand, supply shows up, it’s just more expensive. It’s that simple. The supply and demand matches up, and it’s based on price. This is the first time I can recall… I mean, it might have been after World War II, something similar for awhile, but that it’s not just about money. There is a fundamental shift happening here. So you go to a restaurant. I’ve experienced the same thing. Half the restaurant tables, they don’t have people because there’s not enough help or they’re closed on Mondays. It’s not unique to restaurants. We ordered t-shirts for our company, and they couldn’t get here at a certain time because they can’t get the truckers to come back to work.

So I think we have two things. I think one, with the pandemic, everyone cocooned. They went inside. And some of these jobs are hard. Being a trucker is hard, and being a captain of a ship is hard, and working in a restaurant is hard. A lot of people said, “You know what? I’m not going back to that.” So they sat out [of] it so long. So it’s not just as easy as the restaurant is going to raise wages a little bit and everybody magically shows up overnight. Because unemployment is so low, the economy has come back so strong, a lot of these people are getting jobs in other places.

So, for example, there’s a restaurant one of our clients owns, and a lot of his staff has gotten office jobs working in admin, and front desks, and operations. Because there is so much demand, people are hiring people without that industry experience, and they’re training them up. It’s also been a strong job market for people coming out of school for that very same reason. That’s what makes this unique. Eventually, higher wages are going to bring people back to that space, but they’re going to have to be higher than normal to shake what’s new in this equation.

Jonathan: But will higher wages be enough? I mean, one of the things that we’ve known is going to hit us for a long time is this demographic problem. The fact that the Baby Boom generation is retiring and that there’s going to be a struggle to replace these workers. I mean, over the past 50 years, the labor force has grown at about 1.4% a year. But according to the Bureau of Labor Statistics, in the current decade, we’re looking at labor force growth around 0.5%. So we’ve got this long-running demographic problem that is finally, finally hitting us. Isn’t that going to make it more difficult to fill these positions? And is it going to take maybe significantly higher wages in order to get people to say, “Hey, maybe I won’t retire. Maybe I will persist in the labor force for a little bit longer?”

Peter: Yeah, that’s a good point, but I would say a couple of things about that. So first, we’re not Japan, where everyone is getting really old and there’s no young people. We have the Baby Boom generation –to your point, the generation behind it is not substantive enough to replace all of those openings, but the next generation is, right? So we have a “U.” We have to get through this post-World War II baby boom to the generation that’s coming up now because the U.S. census shows us that the population of the United States is actually growing just on its own. So the problem will solve itself over time. It’s temporary, but we do have have this period of time where a lot of jobs will open up and people tend to move upstream. But I think there’s something else the United States has that’s an advantage over the entire world, and it’s immigration.

Now, I would divide this into two things. So I think when we have the political debate about it, it has to do with immigration at the border, illegal immigration, and should we allow those people to come in or not? That’s not what I’m talking about. There are embassies all over the world where there are a line of people waiting to get into the United States. Just like my parents did, and all my aunts and uncles did. They’re just waiting in line, waiting their turn to come to the United States. They’re educated, and they’re willing to work. So if the United States really had a problem and said, “Look, higher wages doesn’t solve this. We can’t get this fixed,” they could snap their fingers, and in 10 days, have as many people as they want come to the United States that don’t have issues, that have passed background checks and all these other things, and fill all of those jobs.

So, in the short run, I think higher prices are going to bring people back. We’re still working through the stimulus checks and everything else, and we’ll see some permanent increase in inflation over the short run because of this. I’m not sure that’s a bad thing. I think wages need to come up for the service industry so that people who work 40, 50 hours a week can actually afford to live in the United States. But if we really have a problem with the Baby Boomer generation and the generation of their grandkids, it can be fixed for the United States if it needs to. The question is, how long are we going to deal with this in the short run? Right now, the Federal Reserve is acting like we still got an employment problem, and we don’t. There’s “for hire” signs everywhere in the United States right now.

Jonathan: So, Peter, just quickly on this group who seem to have left the labor force, not just going to upstream, as you put it, into manual labor, labor jobs to office jobs, but people who’ve left the labor force entirely in this period. And there’s been references to something called the Great Resignation, people deciding they’ve had enough of the workforce. So, all this working from home, spending their life on Zoom just isn’t appealing. Do you worry that there are a bunch of people who are leaving the labor force right now who are simply not prepared financially?

Peter: I definitely think so, and I think there’s this false sense of security. You don’t have to spend too much time online to see that a lot of people go, “Why am I going to go back to this job when online I’m trading cryptocurrencies and making a ton of money.” Or, “I’m trading pictures of rocks, NFTs, online and I’m making a ton of money?” Look, maybe I shouldn’t use cryptocurrency as an example so I don’t get sucked back into this debate. Some cryptocurrencies are going to prevail, but this idea that everyone is going to sit at home and make 50% a year trading things online, that’s not real. Okay?

That’s temporary. That’s because there’s a ton of money in the system from government stimulus, and private loans that small businesses got, and bailouts that big corporations got. Eventually, that’s going to work its way through, and people are not going to be able to make thousands of dollars a month doing those things. I think that will also… that reality will set in and will bring some of those people back into the workforce, as well. There’s just a confluence of events that have nothing to do with regular supply and demand, which is why this equation doesn’t seem to make intuitive sense.

Jonathan: So, whatever is going on here in the labor force, one of the results of that plus the supply chain disruptions has been higher inflation in recent months. The Federal Reserve’s stance is that this spike in inflation is transitory and it will ease up as these economic bottlenecks are worked out. But it also seems that the Fed is sufficiently concerned about inflation. It’s looking to throttle back the amount of support that it’s providing to the economy. The current expectation is the Fed is going to taper its bond buying program starting in November, and that perhaps we’re going to see an increase in short-term interest rates sometime in 2022. So, Peter, should investors be worried about all of this, the fact that the Fed is starting to ease off the gas a little bit?

Peter: Yeah. So I think, for our listeners, what the Federal Reserve does to get the economy going is basically two things. Federal Reserve does part of it; Congress has some control over some things. But in general, you try to make interest rates lower so people go buy things. Well, that works. People started buying houses, and cars, and planes, and boats. And they just actually put money into the system. You put more money in the system and you lower rates, and prices go up. So the Fed said, “We’re going to keep doing this,” even though after a lot of people said, “Hey, listen. It looks like we solved the problem. No need to keep doing this. You might have another problem, which is runaway inflation,” and so on. The Fed said, “No, no. There’s no inflation. It’s all transitory.”

Well, it turns out probably some of it is not transitory. Does anyone really think that Kellogg’s is going to lower the price of the cereal they just raised, or that Chipotle is going to go back and lower the burrito bowl price that they raised last month, or that McDonald’s is going to go back and lower the price? They’re not going to do that, right? Some of this is permanent. They’ve set the new prices, and it’s permanent, and those raises are more than normal inflation.

Now, part of it is transitory, right? Some stuff really is in a shipping container in China. Until it can get here, prices are going to be higher. There really are supply chain issues. So is the Fed telling the truth that part of it is transitory? Yes. When they say it’s all transitory, that’s not true, and they know it’s not true, which is why they’re talking about reversing what they’re doing. So now is when they will attempt to take money out of the system, and they will also attempt to slowly raise interest rates to try to take some of this heat out of the economy because we don’t want… We wanted to get out of a recession, but we also don’t want to create hyperinflation, either. So now, we’re in this delicate balancing act.

Whenever you have artificial interference, which is what the Federal Reserve is in the business of doing, right, saying, “Hey, look. We’re not just going to let the economy and capitalism operate on its own. We’re going to interfere to make recessions shorter.” Well, once you start to stop priming the pump, is the lawnmower going to keep going? Right? So that’s the part that we’re going to start witnessing here. As they start to raise rates, we’re going to see more of market volatility as the market tries to absorb what’s going to happen now with home prices. Are business owners still going to borrow and hire more people? Will people still go buy cars?

The Fed wants people to do those things, but maybe not at a rate where you buy a used car, and next month, it’s worth more. So this is going to be a delicate balancing act. The market is going to have some volatility while it reacts to this. It will slow down the inflation we’re seeing. Just by definition, if the cost of money is more, you’re going to use it less, right? So it’s going to be an interesting six months to 12 months while they do this. But look, the economy is so strong fundamentally, but it will get through the hiccups along the way.

Jonathan: So maybe a rough period over the short-term, but longer-term, people should probably be grateful that the Fed is taking its foot off the gas because that will mean, we hope, more muted inflation in the long-term. That should be good for all asset classes; not just stocks, also for bonds. Anything else you buy. I mean, one of the reasons this has been such a great four decades for financial assets is because it’s been a period of lower and lower inflation. To an extent, if we can keep inflation low, it’s going to be better for people who are long-term investors. So they should be grateful for what’s going to happen in the months ahead, even if though occasionally you look at the Dow, and feel not so grateful.

Peter: I agree.

Jonathan: So, Peter, the end of our podcast. What’s your tip of the month?

Peter: By the end of the year, by December 31st, anyone with an IRA that’s over… Jonathan, is it 72 still, or is it 70 ½ again? I don’t even recall.

Jonathan: It’s 72, and that was a permanent change.

Peter: Thank you. So they changed it. So if you have to be 72, you’ve got to take your minimum required distributions. So you want to make sure to do that. The penalty for not doing it, it’s pretty severe. Also, you’re able to take up to $100,000 of that and contribute it just directly to a charity, and it counts against the minimum required distribution. So that’s a great law that passed, I don’t know, about five years ago that was supposed to be temporary, but it’s still in place. If you’re charitably-inclined and you have to take a minimum required distribution, it’s the best of all worlds.

Jonathan: So, Peter, my tip of the month: While we’re talking about retirement accounts, is to consider putting money into a Roth any which way you can. Obviously, you want to run the numbers about whether it’s a smart move relative to a traditional IRA or a traditional 401(k). But the fact is in Washington right now, pressure is rising to put a cap on Roth accounts, Roth 401(k)s, Roth IRAs in part because lawmakers are waking up and realizing this is actually a great deal for investors. There have been talks about ending the so-called mega Roth backdoor conversion, which affects 401(k) plans. There’s talks about limiting backdoor Roth IRA conversions.

Who knows what laws are going to come to pass, but the door is still open right now. So, if you’re thinking about a Roth conversion, if you want to put money into these accounts, talk to your financial advisor, see whether it’s a good idea, and get at it because the door may close sometime in the near future.

So that’s it for this month, Peter. This is Jonathan Clements, Director of Financial Education at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down the Middle.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market result is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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