The Dollar, Boomers & AI Stocks

A shortage of workers is boosting wages, but AI may soon help the economy do more with less

By Ilya Spivak

Wages are on the rise. Even after a year of inflation-fighting interest rate hikes, average hourly earnings are growing much faster than usual. The 4.4% year-over-year increase recorded in January was far greater than the longer-term average of about 3%.

Some observers trace the trend to COVID19, but that’s only the most recent part of a story that begins with demographics.

Workers who are 55 or older constitute the largest contingent of the U.S. labor force at 24%. That’s true even though only 39% are participating in the labor market, by far the lowest percentage of any age group. In contrast, nearly 80% of Americans aged 20 to 54 are on the job.

Their age aside, the large number of workers dropping out of the labor pool is pushing wages higher—demand is outstripping supply. What’s more, the 55-and-over crowd has been abandoning the workplace at an increasing rate.

Then it got worse. The pandemic struck and greatly accelerated the trend toward ever-earlier retirement.

Temporary accelerants of price growth— like COVID-related supply chain disruptions—are easing. But COVID-19 also triggered a rapid reshuffling of the labor force that appears stickier.

Those changes in the job market will probably make what’s considered “average” inflation structurally higher in the years to come than in the past 10 to 20 years. Pushback from central banks will keep interest rates higher for a long time.

The transition now underway comes alongside a retreat from globalization. This is epitomized by the deepening challenges along the critical U.S.-China segment of the global supply chain. The legacy of the trade war that began in 2018 remains, with positions seemingly hardening on all sides.

Increasingly frictionless trade over the past three decades did wonders for reducing the cost of business and gave birth to the just-in-time, highly internationalized way of producing almost everything. Reversing this process will do the opposite: Costs will rise, putting higher floors beneath both inflation and policy rates.

In the near term, that probably points to a stronger U.S. dollar. The Invesco DB USD ETF (UUP) tracking the currency’s average value against major counterparts has been in a long-term uptrend since 2014. Prices accelerated higher as the Fed unveiled its rate-hike intentions in mid-2021 and began to execute them in 2022.

A four-month pullback from the peak in September followed, driven by hopes the central bank is ready to stop and perhaps even begin to backpedal as recession looms.

That selloff is now struggling as Fed officials signal a protracted inflation fight ahead. Another leg of the decade-long advance may be next.

Longer term, the demographic changes afoot, coupled with a drive to bring production closer to home amid supply-chain irregularity, will demand a labor market that has to do more with less.

Rabid excitement about recent breakthroughs in generative artificial intelligence (AI) makes sense in this context.

The technology seems to have significant potential as a force-multiplier, enabling the productivity gains necessary to contain merciless cost pressures inherent in trying to support the U.S. economy with a thinner, less-experienced labor force.

The transition will not be quick, but the ever-forward-looking nature of financial markets means asset prices will respond well before broad-based restructuring is achieved.

The iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) that tracks the space suffered alongside global stocks amid the Fed’s inflation fight last year.

However, a bottom may be taking shape. Prices seem to have completed a bullish head and shoulders chart pattern. The setup suggests an initial rise toward the $39-$41 area over the weeks and months ahead.

Ilya Spivak heads tastylive Global Macro and hosts the network’s Macro Money show. @ilyaspivak