Disappearing Tenders

Every year since 1978, central bankers, leading economists, and prominent investors, have gathered in Jackson Hole, Wyoming to discuss economic and policy related issues. Considerable research and human capital is allocated to the conference. The research is technical, thorough, and thought-provoking – enlightening stuff for top-down macro economists.

Instead of making the long trip to Jackson Hole this year (my invitation was lost in the mail again!), I attended a slightly less prestigious, but in my opinion, a more valuable economic symposium. It was held in Orlando, Florida a few weeks ago. Leading participants included the parents, coaches, and players of over 50 softball teams.

I’ve always appreciated the demographic and economic diversity of softball families. If you want an update on the stock or real estate markets, you’re better off signing your kid up for a soccer, lacrosse, or tennis tournament. However, if you’re searching for a timely report from the front-lines of the U.S. economy, softball tournaments can’t be beat.

Attendees of softball economic symposiums have experience in a variety of industries and occupations. Presentations are informal and are typically given after games and during team dinners. Topics and Q&A sessions are broad-based, current, and very informative. So what did I learn at this year’s gathering of economic doers? Quite a bit, actually.

The common theme at this year’s symposium (by far) was rising wages and labor shortages. Given this year’s theme, it was fitting the symposium’s dinner was held at an insufficiently staffed Applebee’s. Instead of their normal eight server crew, the restaurant could only find four servers willing to work on this busy Saturday evening. On the bright side, one server per 30-40 hungry customers made for very long, but informative dinner!

My favorite presentation was given by a parent and restaurant manager titled, “Modern Monetary Policy, Labor Costs, and Disappearing Chicken Tenders”. The presentation began with a discussion on the tight labor market and the difficulty in finding adequate labor. As a manger responsible for recruiting, training, and retaining approximately 200 workers, he had a good feel for the current labor market. The manager pointed to the ceiling to illustrate the direction of labor costs, explaining, “These large retailers are picking off my employees by offering $12/hour. They’re trying to upgrade the quality of their workers, but they’re really just raising the costs of the same labor pool for everyone.”

I had a front row seat of the presentation and knew immediately this presenter was an expert on the real economy. Move over PhDs and monthly jobs reports, this is the guy I want to listen to for an up-to-date summary of the labor market. He continued, “And people think these wage increases are somehow free. Nah, not true. What do you think we do when I’m forced to increase wages?” I eagerly answered, “You raise prices!” While I was expecting a “You damn right we do!” he instead replied, “When we can we will, but not always.” He explained, “We have some crazy competitors that will be bankrupt soon if they keep giving food away. But until they go under, it’s tough to raise prices on everything.” I responded, “If you can’t fully offset rising costs with price increases, what are you doing?” He replied, “We cut back.” He provided an example, discussing how the company recently reduced the number of chicken tenders in their chicken salad.

Providing less for the same price is often referred to as lightweighting. When I think of lightweighting, I typically think of a manufacturer using less material or altering a product’s composition. However, lightweighting is a common practice in a variety of products, services (think longer lines and wait times), and industries – including restaurants.

As a young analyst, I’ll never forget the first time I listened to a management team explain their lightweighting strategy. I was on a conference call of a leading trash bag manufacturer. The manufacturer explained how it planned on offsetting rising resin costs by reducing the number of trash bags in each box. An analyst on the call pointed out the obvious, “This strategy doesn’t seem sustainable. At some point you won’t be selling trash bags, you’ll be selling empty boxes.” Management acknowledged the analyst’s logic stating, “You are quite right. Next question please.”

Whether it’s trash bags or chicken tenders, the key to successful lightweighting is to reduce the quality or quantity of a product (or service) without it going noticed. I asked the restaurant manager if anyone noticed the missing chicken tenders. He said he was aware of one complaint, but explained, “So I have one guy notice there’s less chicken in his salad. That’s not nearly as bad as the response I’d receive if we raised the price of the salad by a dollar.”

His comments caused me to think about the government’s inflation data and how it’s calculated. Specifically, does the U.S. Bureau of Labor Statistics (BLS) account for lightweighting? If so, do they go as far as counting the number of chicken tenders in a salad? It’s an interesting question that few presenters at our softball economic symposium were qualified to answer (myself included).

The restaurant manager’s Q&A session eventually concluded and was followed by presentations from a retail maintenance manager, electrician, and truck driver. All supported the theme of this year’s symposium – the labor market is very tight and wages are rising. However, to be fair, there were other presenters who were less supportive of a strong job market, including a marijuana stock day trader and absolute return fund manager — both were unemployed!

Whether it’s in the form of rising prices or disappearing chicken tenders, there is growing evidence that companies are taking action as it relates to higher corporate costs and rising wages. It’s an environment I’ve been reporting on consistently over the past year and it’s why the Federal Reserve has been forced to raise rates and implement quantitative tightening. Until something in the financial market breaks (consequential asset deflation), I continue to believe the trend in short-term interest rates will remain higher. As such, patient investors, in my opinion, will likely remain the beneficiaries of either higher rates or lower equity prices (Patience – A Possible Win Win).