The Great Imbalance

Despite the sudden onset and vicious reaction to COVID, many jobs once unavailable are finally coming back as local economies continue to reopen. In fact, new job openings are currently sitting at an all-time-high as there are now more jobs available than prior to the pandemic. Just as the pandemic has led to supply chain disruptions across the globe, the U.S. is now experiencing an unprecedented labor shortage that appears to be worsening on a monthly basis. While much of this imbalance can be attributed to a sudden return to ‘normalcy’, there is actually a secondary and potentially more problematic culprit to this issue: stagnant recovery in labor force participation. Growth in the labor force is a key input to economic growth, but if businesses struggling to keep up with demand are unable to find the right talent, how might that hinder a post-pandemic economic recovery?

Take for example my parents who own three restaurants in my hometown of Branson, Missouri – a tourist destination that relies heavily on summertime foot traffic. When the economy grinded to a halt in early 2020, their concern for the business was overshadowed by their concern for employee wellbeing. But despite the initial uncertainty, tourism ultimately rebounded and 2021 has now been their busiest year on record – by a long shot. The only difference? My father’s time spent allocating overtime hours is now spent washing dishes, and a dimly-lit ‘help wanted’ sign hangs in the distance of an overcrowded restaurant lobby. Of course Missouri was quick to reopen and less overhead means higher profits, but why is it that my father – an entrepreneur of 20+ years – is washing dishes in his own restaurant?

Washing dishes may not be a glamorous job, but my father has never had a difficult time hiring dishwashers. In fact, many foreign college students flock to Branson each summer given the abundance of part-time opportunities. This serves my parents well given the seasonal nature of their business, but it also benefits the community by creating long-term career opportunities for those in the local market. The majority of my parents’ leadership team has been with them for several years and most started in entry-level roles without a high school diploma – one of which recently purchased the very restaurant she worked in for over a decade. Once again, not glamorous – but a beautiful cog in a complex economy. Unfortunately this issue has become commonplace for small and large businesses alike, and I’m sure many of you have encountered that all too familiar ‘help wanted’ sign while driving through your local neighborhood. Even McDonald’s is struggling to keep up with demand, and some locations are now offering $50 to any willing interviewees.

So why is it that my father is washing dishes in his own restaurant? The answer may seem simple – “no one wants to work!” But in reality, the answer is far more complex and actually the product of several interrelated economic concepts. The first, and perhaps the most obvious, is supply and demand. When the economy shut down nearly 18 months ago, global supply chains rang silent – but not just in terms of goods and services, but also in terms of labor. We’re all well-aware of the mass layoffs and furloughs that occurred at the onset of the pandemic, and fortunately government stimulus was there for those who needed it most. From stimulus checks to supplemental unemployment benefits, most working class Americans had cash in their accounts at the depths of the recession. But there were also a number of Americans who managed to keep their jobs and/or create new sources of income during the work-from-home era. Better yet, some folks were not just able to save but ‘forced’ to save for the first time in their lives. Earlier this year, Jamie Dimon, CEO of JPMorgan Chase, confessed that a key area of weakness for his company was muted loan demand. In fact, he indicated that everyone from credit card borrowers to multinational corporations were paying down debt and saving roughly 30% of their stimulative inflows. During JPMorgan’s first quarter earnings, the company reported a 24% jump in deposits to which Dimon responded – “consumers are coiled and ready to go.”

This leads to the second concept – velocity of money. Economists have spent decades arguing the true meaning of this concept, but in summary, velocity of money measures the rate at which money is circulated in the economy. High velocity of money typically reflects an active and expanding economy, whereas low velocity of money indicates a period of contraction or recession. As shown below, the velocity of money had followed an upward trend through the late 1990s before reversing course and ultimately cratering after the Great Recession. While the implications are widely debated, most would agree that it highlights inefficiencies in the money supply. In fact, the money supply has become so inefficient that fiscal revenues are now declining as fiscal debt rises exponentially – worsening an already problematic deficit at an alarming rate. What used to be a balancing act has now turned into a lopsided iceberg, the product of which is largely attributable to this very concept.

Money is intended to circulate throughout an economy, but due to the pandemic, many Americans haven’t been able to spend as they would have in years prior. Rather than staying at hotels or dining at restaurants, most Americans were stuck at home accumulating a handsome nest egg of discretionary income. The result? Cash rich consumers that have since grown accustomed to life at home, but when provided the opportunity, they may be willing to spend a few extra bucks on that next vacation. This may help explain why JPMorgan’s deposits increased by 24% last quarter, and why Scott – our newest team member – spent three days trying to score a seat on a flight he had purchased six months prior. While this may lead to an obvious argument for inflation (to which Scott offers some helpful insights here), it also underscores an equally problematic issue that we introduced at the start of our conversation – labor force participation.

These barriers to consumer spending have exacerbated an already inefficient money supply – empowering the average American like never before. With cash on-hand and an appetite to spend, consumers are now more willing to accept higher prices and less willing to work a part-time job to refill the slush fund. I mean after all, why would someone want to spend their day washing dishes when more cash is sitting in their savings account than ever before? What serves as a benefit to the consumer has become detrimental to businesses, some of which have shut down entirely due to labor shortages. Worse yet, most global supply chains rely heavily on this very human capital – further exacerbating pandemic-induced bottlenecks. This in turn amplifies supply/demand imbalances, wherein goods and services have become incredibly scarce (and thus more expensive) while demand has continued to catapult at unprecedented rates. Have you seen the TSA lines at the airport recently, or better yet, tried to purchase a home in the last 12 months? This misalignment of interest is illustrated perfectly in the chart below – reflecting clear incongruence in the supply and demand of labor. Perhaps one day we’ll look back on this period as The Great Imbalance.

Labor force participants must be incentivized to participate, and should interests be misaligned, participation rates will continue to decline until equilibrium is restored. This will further constrict supply chains until impacted businesses are forced to close or automate – both of which will ultimately eliminate future employment opportunities. Recognizing these imbalances, both Congress and the Federal Reserve have been quick to act – but to what avail? Deterioration in the velocity of money has made stimulative efforts largely ineffective, and subsequent increases in the money supply have reignited fears of hyperinflation for the first time in 40+ years. The result is a potent cocktail of economic elixirs – one that even the bartender wouldn’t dare touch. Perhaps this is why President Roosevelt warned that “no country, however rich, can afford the waste of its human resources.”