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To Avoid Raising Wages, Firms Are Now Hiring Felons And Drug Addicts: Beige Book

Courtesy of ZeroHedge. View original post here.

Last month, we summarized  the April Beige Book by saying that a month after the March inflationary panic, the one thing, perhaps the only thing, that was fascinating companies was the threat of trade wars. In fact, we said that the “quick and dirty summary” for the April Beige Book, when economic activity continued to expand “at a modest to moderate pace across the 12 Federal Reserve Districts”, would, in a word literally, be “tariffs” and here’s why:

  • March Beige Book instances of word “tariff”: 0
  • April Beige Book instances of word “tariff”: 36

Fast forward to today when fears of trade wars appear to have moderated (no pun intended) and there were only 22 instances of the “word” tariff in the just released, May Beige Book.

Meanwhile, as trade war fears receded modestly, the various regional Feds found that, once again, the U.S. economy expanded “moderately” through much of April and May, which was a modest upgrade from previous periods, although with little indication of overheating… as was the case in late 2007 and early 2008; one exception to this mediocrity was the Dallas District, where overall economic activity sped up to a solid pace.

The Fed’s Beige Book report, arguably the least market moving of all if sometimes the most interesting as it is based on direct, anecdotal information collected by the 12 regional Fed banks, said manufacturing showed “strong” gains, while employment and prices continued to rise “modestly” or “moderately”

“Manufacturing shifted into higher gear with more than half of the Districts reporting a pickup in industrial activity and a third of the Districts classifying activity as “strong.” Fabricated metals, heavy industrial machinery, and electronics equipment were noted as areas of strength” the report, which was released at 2pm on Wednesday, disclosed.

The Beige Book also found that in a few districts, wage increases and rising material costs, steel, aluminum, oil, oil derivatives, lumber, and cement, were becoming more common.

In good news for benign inflation, “some Districts also noted that their retail contacts were more able to pass along price increases to their customers than in the recent past” which means that broader inflation trends are taking form, potentially the result of broader economic growth.

Or maybe not, because at a time of solid manufacturing growth, the Fed cautioned that consumer spending was “soft”, hindered by flat auto sales, and again noted that companies were concerned by the uncertainty of international trade policy (see 22 instances of the word “tariff” above). “Still, outlooks for near-term growth were generally upbeat.”

But the most interesting anecdotes once again were relegated to jobs and wages.

According to the Beige Book, companies continued to report difficulty finding workers to fill vacancies across skill levels. Just ahead of the month in which unemployment dropped to a near record low 3.9%, “many firms responded to talent shortages by increasing wages as well as the generosity of their compensation packages,” the report said. “In the aggregate, however, wage increases remained modest in most districts.”

Which is especially bizarre in light of some of the anecdotes of pervasive labor shortages, to wit:

Shortages of qualified workers were reported in various specialized trades and occupations, including truck drivers, sales personnel, carpenters, electricians, painters, and information technology professionals.

What is odd, is that according to the Fed, “many firms responded to talent shortages by increasing wages as well as the generosity of their compensation packages.” In the aggregate, however, wage increases remained modest in most Districts. Contacts in some Districts expected similar employment and wage gains in the coming months.

So instead of paying their workers more, some firms have come up with a radical solution: hiring criminals and drug addicts.

One such example came from the St. Louis Fed which had the following anecdote: “Contacts in Missouri and Arkansas also reported difficulties filling skilled technical and engineering positions. Some local employers have begun relaxing drug-testing standards and reducing restrictions on hiring convicted felons in order to alleviate labor shortages.

Incidentally, this reminds us of what a Beige Book last April found:

One respondent said that during a recent six-month attempt to add to staff for a new product, two-thirds of applicants for assembly line jobs were screened out before hiring via math tests and drug tests; of 400 workers hired, only 180 worked out.

One year later, with nothing changing, and nobody willing to pay more for labor, resourceful employers found a way to bypass the negative effect of labor shortages: avoid the drug tests and background checks altogether, and just hire criminals and drug dealers. Oh, and there was also this tangent from the Dallas Fed:

One staffing services contact noted that some firms were rehiring former retired employees on a part-time basis to meet their staffing needs.

We bring this up just in case there is still confusion why America’s productivity has hit rock bottom and is now digging into the rock.

And here are some other amusing anecdotes from the Beige Book courtesy of Bloomberg:

  • Boston: Two retail contacts specifically noted that higher fuel prices and a shortage of truck drivers were contributing to higher shipping costs.
  • New York: New York city hotels and Broadway theaters have reportedly raised prices somewhat in recent weeks, with Broadway theater ticket prices up more than 10 percent from a year earlier.
  • Philadelphia: Construction of industrial warehouse space continued apace – ‘a frenzy,’ according to one banking contact – faster than the labor supply, according to another banker.
  • Cleveland: One grocery chain operator noted that population loss in his region and increased use of alternatives to physical store locations had led to weaker regional sales activity relative to the rest of the country.
  • Richmond: One port executive said that volumes remained strong despite some volatility in shipments resulting from delays at other east coast ports.
  • Atlanta: Contacts cited concerns that steel and aluminum tariffs will raise overall costs and slow activity.
  • Chicago: Multiple contacts noted strong demand for single-family starter homes but stated that low inventory continuted to hold back sales.
  • Minneapolis: Thanks to heavy snowfall, Montana resorts reported strong ski seasons; one resort bested its previous record for visitors by 10 percent.However, a cold and wet spring--including record April snowfall in some parts of the District--delayed or otherwise dampened fishing-related visits and spending in northern areas, where lakes remained frozen as long as a month later than normal.
  • Kansas City: In Wyoming, applications for drilling permits are at record levels as producers seek opportunites to operate in the Powder River Basin.

  • Dallas: One staffing services contact noted that some firms were rehiring former retired employees on a part-time basis to meet their staffing needs.
  • San Francisco: Contacts in the San Francisco bay area noted that office rents and occupancy rates rose moderately because of increased demand by technology companies

Needless to say, as long as employers continue “expanding” the labor force by hiring criminals and junkies, it is safe to say that wage growth will remain non-existent.


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