Expert Q&A: Inflation, Tariffs, and the U.S. Labor Market
Both before and during each Market Pulse webinar, our audience submits their burning questions to our expert panelists, some of which we run out of time to cover in the live webinar and which we then answer in this blog. For our February Market Pulse webinar, our webinar panel included Dr. Robert Wescott, President of Wescott Strategic Advisors, and the Equifax Advisory team. Below are their answers on questions around the labor market, household wealth, inflation and more.
Q: How possible is it for the U.S. household wealth to be affected by a Japan-like situation that leads to a decade of stagnation?
Dr. Robert Wescott: Japan's so-called "Lost Decade" (which really became two lost decades) was driven by a collapsing real estate market (prices down by 90% from peak in Tokyo and Osaka), a collapsing stock market (from a late 1989 high of 39,000 to a low 20 years later of 8,000), and falling population. A sharp decline in U.S. equity markets is, of course, possible, but U.S. real estate prices seem unlikely to drop by more than the 30% they did during the 2006-2009 real estate bust. Plus, the U.S. population is on track to keep growing. The overall chances of a Japan-type collapse do not appear to be very high.
Q: Is the size and lack of growth in the current U.S. workforce a concern? Are there offsets, for example, with AI to mitigate the number of workers needed?
Wescott: The U.S. labor force increased by 2%+ a year when the Baby Boom hit the market in the 1970s and 1980s, and by 1.25% a year in the early 2000s. Now it has dropped notably and is only increasing by about 0.5% to 0.7% a year. AI could help take over some jobs, such as web designers, programmers, and administrative workers, but will not do much to replace "physical presence-required" jobs such as janitors, construction workers, restaurant cooks and waiters, etc.
Q: What are tariffs meant to do?
Wescott: Tariffs are simply a tax on imports paid by domestic consumers. In the early days of America, implementing state sales taxes and income taxes were difficult and required sophisticated government tax collection schemes. But customs or tariffs could be collected fairly easily by customs agents at ports. So back in the 1700s and 1800s they were just a relatively straightforward way to collect revenues. Tariffs can be used to discriminate against goods produced in foreign countries to try to boost domestic industry. However, they are generally disliked by economists because they can make domestic manufacturers raise prices and become less efficient in their operations than world class manufacturing standards. Over time, high tariffs make a country uncompetitive globally. However, they sometimes can play a useful role if a foreign country actively subsidizes its exports to try to “buy global market share.”
Q: Everyone’s talking about inflation. What sort of indicators should we be watching to understand what’s happening with inflation?
Wescott: We have what we call our “top 45 CPI categories to watch.” This is our measure of service sector inflation or underlying inflation in the economy. These items comprise about 40% weight in the overall CPI. Some of these items are rent (but not owners’ rent equivalent), food and beverages away from home, water, sewer, and trash collection, insurance, cell phone bulls, airfares, electricity, and educational services.
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