Monday's Scoop: Conflicted☀️

Hey friend - thanks for your patience with today’s email. I just got back from ringing the NASDAQ closing bell with JUST Capital! JUST is the leading non-profit advocating for workers and more responsible business practices. I’m proud to be on the JUSTGen Core Council and an observer on the board of JUST Capital. -Augustus

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Here’s what you need to know today…

1. Companies are still hiring a lot, and wages have picked up.

2. The economy showed signs of a rebound in January.

3. Corporate year-end profits have been mostly underwhelming.

S&P 500: 4,942.81
1Mo: +4% | 1Yr: +20% | 5Yr: +83%

The market broke from the record rally today as investors worried about borrowing costs staying high for a while longer. Federal Reserve Chairman reiterated his doubts about cutting interest rates next month on a 60 Minutes TV interview yesterday.

Companies are still hiring more than anyone expected. The Labor Department reported employers added 353,000 more jobs in January, nearly double what economists projected. The hiring was more widespread than in December, led by business services, healthcare, retail trade, social assistance, and manufacturing. Labor force participation stayed strong, and the unemployment rate remained near record lows of 3.7%. Wages picked up in January, with average hourly earnings increasing 0.6% for the month, up 4.5% over the prior year. It’s great news for Americans but a warning sign for policymakers. [🤓]

The economy showed signs of a rebound in January. The Institute for Supply Management’s business activity index for the services sector jumped in January, marking the 13th straight month of expansion. The growth was widespread, expanding across 10 of the 17 measured industries. Employment and new orders picked up, but so did prices. It may raise concerns about an inflation resurgence.

Corporate year-end profits have been mostly underwhelming, except for Big Tech. We’re about halfway through fourth-quarter financial reports for the S&P 500 companies. Usually, most companies report better profits than they forecast, but both the percentage of companies reporting better profits than expected and the magnitude of the excess profits are below average. It’s a similar situation for revenue. If you ignore the massive profits of the six biggest tech companies, the results get much worse. Big Tech is carrying the team.

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Why do economists not like to see wages grow?

Policymakers don’t like wage growth because they worry about a wage-price spiral, something like an economic doom loop. In theory, since most Americans spend nearly every dollar of their income, too much income too quickly will spark uncontrollable spending. That excess spending could create over-demand for the same amount of goods and drive up the prices of everything, raising living costs further. So policymakers don't want too much hiring because too much demand for workers would give labor too much power to negotiate higher wages. Higher wage costs could also lead companies to raise their prices, pushing living costs higher. However, this academic argument assumes that corporations aren't already raising their prices as much as possible to maximize shareholders' profit. The system is designed for perpetual corporate income growth but not labor income growth.

However, prices for goods and services aren’t solely a function of cost, especially for big companies. Increasing costs usually leads to some mix of lower profits and higher prices. Data suggests that investing in workers can yield higher returns and actually minimize costs over time. However, most major companies get stuck in short-term thinking.