 Monday, September 05, 2022 | | | Welcome to Mind Your Business ! Consider this your weekly guide to understanding what’s happening in the worlds of economics, business and finance. By Peter Armstrong | | |  | Wages are declining fast as inflation remains high. (kentoh/Shutterstock) | | | The Bank of Canada is widely expected to raise rates again this week. Another 75-basis-point hike is pretty much baked in by markets (though smart forecasters believe it could be as low as 50 bps or as high as 100 bps).
It means the cost of borrowing will increase again and that already indebted households will be further squeezed. I get a lot of emails from readers asking why the bank is continuing to push rates higher if the pace of inflation appears to be decelerating.
At least some of the answer lies in the most insidious part of inflation. Yes, inflation means the price of everything from groceries to furniture is going up, but it also means your wages are falling.
Inflation came in at an annualized pace of 7.6 per cent in July. Wages aren't keeping up, but that's only part of the story.
I don't want to get too deep into the weeds here, but the bigger picture comes when we look at "real wages" instead of "nominal wages."
Statistics Canada says on an annualized basis, wages were up 5.2 per cent in July (and by the same amount in June). That's nominal wage growth.
Real wages look at how much money you make after inflation. The math is a bit complicated, depending on how you calculate it. But as a rough rule of thumb, take your nominal wages and subtract the rate of inflation.
Inflation was up 7.6 per cent in July; nominal wages only grew by 5.2 per cent. So "real wages" were actually negative. | | |  | | | Now, you may say, hold on a minute. Nominal wage growth minus inflation should leave you at 2.4 per cent! And you're right. As I say, it depends on how you calculate it.
I got the data for that chart from the wonderful Brendon Bernard, an economist from the job search firm Indeed Canada. (He posts tons of smart, accessible stuff on Twitter. Give him a follow here.)
He told me he got the 2.2 per cent number by figuring out the real wage first and then calculating the year-over-year growth off that. But the general rule of thumb works to get a general sense of how much your wages have fallen since inflation took off.
My colleague Don Pittis has been sounding this alarm for ages. He wrote about real wage decline and why it matters here and here.
Do yourself a favour and read those. But the main takeaway is that this is what they mean when experts warn that inflation is eating into your purchasing power.
You get hit by a double whammy of rising prices and lower relative wages.
That's one of the key reasons the Bank of Canada will continue to raise rates to fight inflation. Even if the pace of price increases is decelerating and economic activity is slowing, the biggest fight in the economics world right now is around inflation.
GDP numbers posted last week showed the economy was slowing at the end of the first half of the year and may have even contracted in July.
This week, we'll get the latest Canadian jobs report.
Over the past two months, the labour market has cooled significantly. | | |  | | | Economists expect Canada added about 5,000 jobs last month. Still weak but better than losing jobs. The thing to remember is why they think the job market has slowed so much.
"These recent sluggish developments stem almost entirely from a lack of available workers, not weakening demand," wrote Nathan Janzen and Claire Fan in this paper last week.
U.S. jobs numbers provided a surprising upside on Friday, with employers adding 315,000 jobs in August. That's not as high as it was in the spring, but it's nothing to sniff at.
The unemployment rate ticked up a notch. But it climbed because more people were looking for work, not because of layoffs.
If there's such a thing as a soft landing in a slowing economy, rising rates and stubbornly high inflation, that's what it would look like.
As always, send me a note here.
I'm still working through my backlog of emails, but I'm getting there. I love hearing from you, even if it takes me a while to respond. | | |  | | The Bank of Canada will unveil its latest interest rate policy on Wednesday. Economists believe another 0.75 per cent hike is coming as the bank tries to push its key lending rate out of the so-called "neutral zone." | | | | | | We'll get fresh Canadian jobs numbers on Friday. Over the summer, Canada has lost 74,000 jobs. Look for a small gain for the month of August. | | | | | | The global price of oil has been on a roller coaster ride this year. Prices of WTI peaked in early June at $120 per barrel. They've since collapsed back down to $86. OPEC countries will meet on Monday to discuss production quotas. | | | | | Three things to read, watch and listen to this week | | |  | The Bear is ostensibly the story of a man trying to run a restaurant. But it's also the story of an economy. (FX) | | | 1. The Bear is the story of an economy | | | Everyone is talking about the new FX series The Bear. It's smart, it's funny, it stars the wonderfully handsome Jeremy Allen White (from Shameless).
It's the story of a chef who comes home to take over his brother's grungy restaurant in Chicago. The brother recently died by suicide and the emotions of family and co-workers are very real and very raw.
It's well done and well written and everyone says it's a hit. By how does a show like this end up on the recommendations of a newsletter all about the economy?
Well, one of the things the show does best is highlight the struggle of running a small business. How do you manage a broken supply chain? How do you pay your staff through hard times and fix broken equipment when you can't afford it?
How does a business change and how long do you hold onto the old thing that (sort of) works before you pivot and do the new thing that should work really well?
The Bear is a show about the economy without ever discussing the economy, and that's why it works. It's real and anyone who's ever run a small business will recognize so many of the forces at play.
Plus, it's a great show and we should all try to support shows that strive to break from the mould a bit.
Check out the trailer for The Bear here. | | | 2. Serena Williams's next play | | | Serena Williams run as the plucky upstart challenging to win the U.S. Open Tennis Championship drew to an end this weekend. Even if you aren't a big tennis fan, there was something riveting about watching her storm through what was supposed to be a farewell tour.
Williams is an absolute force on and off the court. She won 23 Grand Slam singles titles. She earned $94 million US in prize money along the way and made an estimated $350 million in endorsements. She's a part owner of the Miami Dolphins.
Before her retirement from tennis (she's calling it "an evolution away" from the sport), she launched Serena Ventures. The venture capital firm has already invested in 60 startups.
"Men are writing those big checks to one another, and in order for us to change that, more people who look like me need to be in that position, giving money back to themselves," wrote Williams in this piece in Vogue last month.
She is making diversity a focus for her fund, and among her latest investments is Karat, which aims to help more Black software engineers get hired.
Williams has already changed the way we think about sport. And though her tennis career may be over, it's clear she's not done changing the way we think about the world.
Read this piece on her VC firm on NPR here. | | | 3. The Middle Class squeeze | | | The pandemic has been tough on everyone. It was scary and volatile and unprecedented in so many ways.
But there were glimmers of good news stories sprinkled amid the waves of disaster. Stock markets went on a tear. And the Wall Street Journal says upper-middle-class investors were able to make good money.
But what's happening to those investors now that the markets aren't quite so rosy?
One of my favourite podcasts is the WSJ's Your Money Briefing. It's smart and fun and mercifully short. It runs about 10 minutes and tells a clear, concise story every day about some force at play in the economy.
In this episode, host J.R. Whalen was joined by Wall Street Journal reporter Dion Rabouin to talk about what's happening to investors this summer.
"2022 has been a reversal of fortunes," said Rabouin. He says middle-class Americans made piles of money on the stock market in 2020 and 2021. They were able to save money while so much of the economy was closed due to COVID restrictions.
But as the economy cooled and the stock market fell into bear-market territory, those gains have been lost.
"They have had to started to dip into their savings, their stock gains have been eroded more significantly than any other group and overall, they’ve been able to put away less than in savings than any other group other than the poorest Americans."
Whalen and Rabouin say they consider "upper middle class" to be anyone who makes between $75,300 and $127,300 US per year. They say that captures those Americans who fall outside the top 20 per cent of earners.
They interviewed Mark Yu, a 33-year-old from Texas who managed to make some decent returns as markets soared during the pandemic. He took some of those earnings and invested in real estate.
Now, though, the markets have given back some of those gains and higher rates are squeezing him.
"I started working extra shifts," he told Your Money Briefing. "This is because my expenses have (gone up) as well as my property expenses in order to maintain the properties I have acquired."
Check out this episode of Your Money Briefing here | | | How the economy looks beyond Bay Street | | | My favourite indicator | | | You may point to the S&P 500 as the ultimate indicator of the economic landscape. Or perhaps you'd choose the myriad data at Statistics Canada on GDP, CPI, jobs, etc.
I, in turn, would hold up the relatively obscure but absolutely wonderfully named Baltic Dry Index.
Investopedia defines it this way: the BDI "is an index of average prices paid for the transport of dry bulk materials across more than 20 routes."
Basically, it measures the cost of shipping raw materials (think coal and steel). So my eyes popped at the sight of this tweet from Liz Ann Sonders, the chief investment strategist at Charles Schwab & Co. |  | Shipping was one of the first and most important drivers of inflation. In the early days of the pandemic, supply chains were a mess.
Slowly, armies of logistics experts and ship crews and dock workers around the world scrambled to reset. Containers were in all the wrong places, purchasing habits were upended — it was chaos.
But that's the job of those who work in supply chain: figure out what the chaos is and work to impose order.
This chart tells me they're winning. And that should come as a relief to everyone.
One last note: in my last edition, I included a bad link to the chart looking at how big Saudi Aramco really is. I'm still not entirely sure how I screwed that up, but please find the proper link here.
And thanks to all who flagged it for me. Really love all your feedback (even when it's pointing out what I got wrong). | | | That's it for this week. | | | Drop me a line anytime. Send ideas, comments, feedback and notes to peterarmstrong@cbc.ca. Problems with the newsletter? Please let me know about any typos, errors or glitches.
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