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NFIB, Wages, And Inflation - January 8, 2019

“The Index...can’t be expected to improve every month”

Last week we covered confusion among consumers about job prospects, however, the latest NFIB cries loudly that among the small businesses polled, there isn’t any confusion. According to the Small Business Optimism survey, “Job openings set a new record high, job creation plans strengthened, and inventory investment plans surged”. Admittedly, the overall Small Business Optimism Index “was basically unchanged” and dropped 0.4 points to 104.4. This drop was due to declines in expected sales growth and expected business conditions. But all is well, as the Summary reports, “The Index remains at historically high levels but can’t be expected to improve every month”.

There is some additional good news. According to the NFIB’s commentary, “NFIB surveys... have shown that there was and is no inflation threat and now shows that despite the gloom and doom in the press, Main Street remains historically very strong, setting record levels of hiring along the way”. This squares nicely with Jerome Powell’s comments last week at the American Economic Association meeting in Atlanta. There, he discussed the remarkably strong labor data from the jobs report, especially the “quite welcome” increase in average hourly earnings. He noted the increase “at this time... does not raise concerns about too high inflation”. This also squares with Powell’s commentary following the December FOMC meeting that, “Wage increases do not need to be inflationary”.

Sound familiar? Are we back to the “What, me worry?” dynamic from October? While Powell’s commentary hints of the lady protesting too much, 2014 research from the Cleveland Fed bears out his assessment. “Taking a closer look at the connections between wages, prices, and economic activity”, the paper finds that while “wages appear to be useful in assessing the current state of labor markets”, they are “not necessarily sufficient for thinking about where the economy and inflation are going”. Rather, “The connections among wages, prices, and economic activity are more akin to a tangled web than a straight line”. Here’s to hoping there’s nothing venomous in those webs.