The Future Ain't What It Used to Be

Hey everyone, and welcome back to The Long Run. We’re back after some time off and travel in Europe. After many miles run, pretzels and liters of bier consumed, and good times had, it’s nice to return to the normal routine.

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Why is coffee so expensive now?

It seems like you can walk down the street, go into any coffee shop, and everything is more expensive. Even a small drip coffee can cost you $4+ at many places, and that’s often the cheapest thing on the menu.

Almost everything is more expensive now than a few years ago — it’s not just your morning cup of joe. And a lot of factors go into making items in our everyday lives pricier – supply chain challenges, currency fluctuations, increased money supply, government policies, natural disasters, higher cost of inputs to products & services.

These are all interrelated, but out of all of them, that last one is one of the most impactful – the higher cost of inputs. And in our increasingly service-based economy, the main cost of inputs is the cost of labor.

When the cost of labor goes up, the cost of the products businesses sell goes up. And if the cost of those products goes up, people will either 1) demand higher wages so that they can afford those higher prices of goods, or 2) not buy those goods altogether.

This is important because option 1 requires higher pay, which further exacerbates the cycle by making products even more expensive. Option 2, on the other hand, will slow down consumer spending at-large.

And that’s important because consumer spending makes up roughly 70% of our nation’s GDP. Our economy works well when people are spending.

But the interesting thing about the weird economy we live in today is that consumers have not yet really chosen option 1 or 2. Instead, there’s a third option – just keep spending. And that’s exactly what we’ve been doing.

After the pandemic, due to pent up savings, as well as government stimulus, individual households were sitting on a ton of cash.

And while we’ve still spent down some of that through the “revenge spending” of the past two years, households in aggregate still look well-equipped to weather an economic downturn.

And that’s just cash savings – we can’t forget the home equity that anyone who bought a home over a year ago is experiencing, as they’re essentially locked into a “free money” mortgage, where they borrowed at interest rates that were lower than what a cash reserve account pays today.

When we look at household net worths, we see that they actually declined by 3% year-over-year in Q4 of last year. Historically, negative growth in net worth has almost always only occurred during a recession.

But by Q2 of this year, household net worths were growing at nearly 5% again (nearly as much as inflation!).

Now, of course a single indicator never tells the whole story, but if you look at historical trends, household net worth year-over-year change tends to precede inflation by a few months.

Intuitively, this makes sense. People see their net worth grow, and subsequently they spend more money on things, which increases demand for goods and services, and prices go up.

So what does this tell us? Maybe the dip we saw in late 2022/early 2023 was in some way a mini “recession” itself. And if household net worths are rising again, maybe consumers are actually in better shape than we think?

The caveat here is that through periods of prosperity, the growth in household net worth outpaces inflation. And even though household net worth is growing again, inflation is still (at least for now) growing faster.

Yes, inflation has come down from its peak in 2021, but inflation is a rate of change, not an absolute value. So even if inflation continues to drop, as long as it’s greater than 0, your $7 latte won’t be less than $7 ever again – it might just take a bit longer before it goes up to $8.

What’s going on with jobs?

So people have a lot of money saved up and seem to continue spending as if everything is fine, but what about jobs?

Despite the economic slowdown we’ve all been told is coming, the job market continues to defy expectations.

The US economy added 336,000 jobs in September.

And yet, just walk down the street and stop inside any restaurant or bar, and you’ll find that everywhere is seeking help. We can’t fill these types of jobs fast enough.

The data and the on-the-ground anecdotes don’t seem to match the narrative we’re being sold.

When there’s a shortage of workers, businesses need to pay their workers more. When wages go up, businesses need to increase prices to offset the cost of inputs.

This WSJ chart shows how the growth in prices and the growth in wages has flipped back in forth over the past few years.

As Ben Carlson puts it, “People hate paying higher prices but the consolation prize for higher inflation is higher wages.”

Who will fill all the open jobs?

I think the broader problem at large is not one of people finding jobs – we have more jobs to fill than we have people looking to fill them. Rather, we’re seeing early signs of “the curse of a developed economy” – one that relies on individuals for service jobs with unfavorable (or less than ideal) working conditions, while demographic trends are working against us.

Anecdotally, there are probably more people with college degrees struggling to find jobs in their field of study, while most of the job openings today appear to be in service-related industries that typically don’t require college degrees to begin with.

Just look at the jobs added in last month’s expectation-defying report. The majority were not in cushy 9-5 corporate roles (i.e. professional & business services, information), but rather, in restaurants & hotels (leisure & hospitality), skilled trades, and jobs that require sweat.

We are living in two different economies. For knowledge workers, the era of free money and low interest rates is behind us. It’s why we continue to see layoffs all across the technology industry. It’s why college graduates making six figure starting salaries at big consulting firms don’t have enough to do.

And the crazy part? Automation and advancements in AI should theoretically reduce the number of employees needed at these traditional high paying office jobs.

But for many industries which do not require specific college degrees, the front lines who actually provide tangible value to people, those are the jobs we can’t fill.

Food service, hospitality, health care, and social assistance continue to struggle to retain workers.

Pair this with the fact that the oldest segment of the US population is growing, while the youngest segment is shrinking, and we find ourselves in a bit of a predicament.

More retired people means more people spending their discretionary income and time on things like restaurants, travel, and health care. All of that increased spending will require increased support in people providing those services.

And who are the people providing those services? The youngest generation of workers, who are 1) smaller in number, 2) increasingly educated, and 3) [anecdotally] less motivated to make money.

So the youngest generation is not only a small slice of the population, but the percentage of that slice who is participating in the labor force is also declining.

Put all of this together, and something has to give. Either:

1. The industries experiencing worker shortages will have to increase wages even more than they already have to attract more workers (which will subsequently increase product prices);

2. The demand for those products and services will have to drop (which seems unlikely given current trends, but may happen if there’s an economic downturn); or

3. Young people who are currently unemployed will have to actually find jobs, and they might not be the most desirable ones.

I think we will see some combination of each of these – prices will continue to rise as there’s a struggle to find labor, which will subsequently force people who are spending money to pay more for those products and services.

And that extra money will have to come from somewhere – maybe it’s fine to not work right now, when pandemic-juiced savings accounts and government stimulus are keeping you afloat, but eventually the punch bowl will be empty, and somebody will have to pay the price.

The future ain’t what it used to be

More broadly, I think young people today are increasingly short-termist relative to older generations, and that short-termism manifests itself in a lack of purpose or meaning in life that prior generations may have found through religion, community organizations, sports, and/or work.

And I don’t particularly blame the young people as much as media outlets profiting off of the viral spread of bad news.

That seems to be the prevailing mindset of a lot of young people today – probably due to social media and how quickly stories that fuel outrage spread, higher education pushing specific political agendas, and the decline of organized communities, sports, and religion.

As Yogi Berra once put it, “the future ain’t what it used to be.”

The question I’m seeking to answer is:

How can we inspire the youngest generation to regain purpose and meaning in today’s increasingly digital and polarized world?

Rather than accept the unfortunate future we’ve been told is ahead of us, let’s build a future of prosperity. Let’s have hope that the world will be a better place 30 years from now than it is today. Because a life of hope, of meaning, of serving others, is one worth living.

Let’s be for something, rather than against it.

We can stop poo-pooing everything that’s wrong with the world and instead look at all of the positives and the amazing talent that the youngest generation has, talents that generations above them would have never dreamed of.

We live in one of the greatest times in human history to be alive.

While the future is impossible to predict, I think there’s a lot of value in understanding what people are actually experiencing and what the data is saying, as opposed to the stories we’re fed through traditional media.

As Ben Carlson describes it, “The amount of energy needed to refute bad news is an order of magnitude bigger than the amount needed to produce it.”

Everybody wants to be the one who predicts the next crash, and it’s easy to be a doomsayer.

But if we pause and accept with humility the fact that no one knows where we go from here, maybe we should have reason to be optimistic.

Nothing is ever as good or as bad as it seems.

There are two great things about recessions — they always happen, and they always end.

Things will always get better – it’s what humans do best.

But as for that $7 latte? Well, get used to it, because it’s probably not getting cheaper.

-Owen

Fresh Finds

Bodegas: The Small Corner Shops that Run NYC (BBC)

Article | 5 minutes

Pretty interesting history of the classic New York City bodega, and the role they’ve played as places of belonging and convenience throughout the city’s history. Historically owned by Hispanic entrepreneurs, there are now over 7,000 bodegas scattered throughout the city, stocking just about everything you could possibly need, from bagels to beverages to fresh produce to batteries. If you want a taste of a truly New York experience, you should definitely visit one next time you’re here.

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