Thomas Tzitzouris sees jobs as the big economic “wild card” in 2023.
A labor market characterized by low unemployment can have a downside for businesses in the form of higher wage growth, which can sap profits and investment returns and make inflationary pressure “sticky,” according to Tzitzouris, head of fixed income research for Strategas Research Partners and the keynote speaker at Providence Business News’ Economic Trends Summit on Jan. 26.
The problem right now: “The wild card this year is how … the labor market behaves. That is a very difficult thing to predict,” Tzitzouris told the summit attendees.
Will employees continue to have more options and make greater demands? Will the younger generation step in to fill the voids? The answer to these questions will have an effect on how long or how painful a recession will be.
But Tzitzouris said the answers are difficult to decipher because of an economic shift that has occurred.
“We have entered a world of structural rigidity in the labor market, structural supply chain bottlenecks, energy shortages and political instability,” he said, referring to the concept that certain aspects of the economy have reached an inflexibility to change and operate freely. “The regime has changed.”
Other aspects of the 2023 economic picture have been easier to forecast.
Inflation should come down as the Federal Reserve tops out on increases to its benchmark interest rate, which Strategas predicts will hit a ceiling at 5.25%. The institutional research and advisory brokerage based in New York City predicts a recession in the second half of 2023.
Aggregate wages grew by 4.5% in 2022.
“That is at a level that is typically very bad for operating margins and bad for long-run inflation,” said Tzitzouris, who is based in Rhode Island. “This sticky component … is really a big concern for the Fed. And that is what they are going to target.”
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Tzitzouris expects the central bank will have an extraordinarily difficult challenge ahead this year, trying to balance inflation while managing wage growth, which is one of the main components of a company’s overhead.
“[The Federal Reserve] is going to have to destroy demand,” he said. “And the only way it can do that is by destroying jobs.”
One example of this delicate interplay is how continued inflation and higher prices are leading to increases in household debt, which is “essentially at an all-time high,” Tzitzouris said.
The typical American household making between $60,000 and $70,000 is now spending between 10% and 20% of their after-tax disposable income on debt interest alone.
“This is unsustainable,” Tzitzouris said. “The labor market is fragile. If you see a small increase in unemployment, that could quickly become a large increase in unemployment because of issues like this.”
And businesses are feeling the heat. Tzitzouris said that less than half of business owners polled do not expect conditions to improve within one year. Data shows that many younger workers are unwilling to sacrifice time or convenience for changing careers that offer better opportunities and help stave off unemployment spikes.
“We joke about it, but this has serious implications for the labor market,” Tzitzouris said.
Rising unemployment can be tempered if millennials and their Gen X predecessors are willing to take on career training or move to regions of the country where industries that have the most growth potential are centered.
But Tzitzouris said smart money is betting this will not happen in any large measure.
“We are in a game of chicken with an irrational player,” he said.
The coming recession may not be as bad as previous economic downturns, Tzitzouris said, but a certain amount of pain is on the horizon.
“Recession just seems inevitable this year,” he said. “It’s just a matter of time.”