ADP Chief Economist Nela Richardson joins Yahoo Finance Live to discuss inflation, the Fed's 2% target, the U.S. labor force, and the state of the consumer.
- Taming inflation has been one of the key drivers of the Fed's rate hike decisions. And while headline year-over-year inflation has been showing signs of cooling, the aging US labor force highlights an inflation risk. Here to break all of this down and more is ADP chief economist Nela Richardson.
Nela, thanks so much for joining us. Let's start with the inflation conversation and, kind of, your perspective on what the Fed is doing. Let's talk about even the 2% target that it's going for. Can it hit that?
NELA RICHARDSON: It's possible, but it's going to be hard. And it's harder than it was prior to the pandemic and here's why. So the Fed is really a short-term agent. It acts in terms of cycles. It's really trying to lower the inflation down to that 2% in the here and now.
But the future of inflation is somewhat outside the perspective of monetary policy and it really has to do with demographics. When you see the prime age workforce, that population rising, that is deflationary according to academic research. And when you see the nonworking population rising, it's inflationary. And that's exactly what we have in the United States and in most advanced economies, very young and somewhat older are growing faster than the working age population in their prime age working years.
And so that's going to put some pressure on inflation as people consume more, but produce less as a population. So those are the long-term dynamics. And the short term, it's really about whether or not the Fed can, despite these longer-term trends that pump up inflation, keep inflation moving in the right direction over the next few months.
- So I got to ask you with regards to the Fed's next meeting coming up in June. There's expectation the demographics are changing on what-- or percentages, I should say, are changing on what's expected to come out of this meeting. Will the Fed pause? Will it actually raise again? What's your expectation coming out of the June meeting?
NELA RICHARDSON: I think it's too soon to tell to call this the June meeting. I know there was discussion just now about whether the markets are right or whether the Fed is signaling something different, but the consumer is always right. And then what the consumer is saying is that, yeah, we're still spending, but we're not spending as urgently or as excitedly as we've done in the past.
And so we've seen a rebound in consumer spending trends a bit in April from the slump in March, but it's clear that inflation continues to take its toll on the consumer. And so that's the watch point, how are interest rates affecting the consumer versus how inflation is affecting the consumer. And so in that June meeting, I think they're going to see another read on the labor markets, which has been supporting consumer spending this whole time, but also whether or not the consumer is bending to the inflationary pressure.
- And so you say the consumer is always right. How would you characterize the state of the consumer right now?
NELA RICHARDSON: The consumer has been resilient this whole time, but it's been-- but it hasn't stood still. At first the consumer was spending on a lot of goods and then it shifted to services. In this last report, we're seeing the consumer, kind of, back away from both of those things that were the highlight of their spending trends. They're not buying big ticket items to the same extent, automobiles, and furniture, and they're not really leaning in terms of restaurant seating and consumer facing services.
So the consumer is in that selectiveness. They're looking at the necessary items that they need, not necessarily bending in either direction. And we didn't see a big rebound in April.
So consumers holding the line, that's great. It's been supported by a strong labor market. But inflation is definitely having an impact.
- And I want to ask you about the labor market in particular. You've put out your thoughts on it. And you say the Big Quit is over-- what we call the Great Resignation-- and now it's time for the Big Stay. What do you see and what do you mean by that?
NELA RICHARDSON: Sure. The Great Resignation, as it was known, wasn't driven by economics. It was driven by the fact that people, during the pandemic, kind of, re-evaluated their relationship to work.
But it was definitely supported and fueled by the economics of the labor market. The fact that there are all these fiscal programs that were started during the pandemic to aid the consumer during this emergency time, but also supplemented by the fact that there was plentiful job openings, and lots of opportunities, and lots of rewards from job switching. Now we're seeing that those economic drivers and supports are starting to wane.
First of all emergency, contributions to the household have ended or are ending with student loan deferments ending this summer. We're seeing the gains in terms of job-- wage gains to switching ease. They're no longer commanding the same pay growth they did from switching jobs. And so with the ends of these supports and the benefits from job switching, people are now going to be incentivized to stay on the job longer.
- All right, we'll have to leave it there. Our thanks to you, Nela Richardson, chief economist for ADP.