KEY DATA: Openings: +142,000; Hires: -111,000/NFIB Optimism: +2.3 points/Employment Trends: +0.5%
IN A NUTSHELL: “Though small businesses are becoming more optimistic and job openings are increasing, hiring has yet to hit its full stride.”
WHAT IT MEANS: The December jobs number was a lot better than expected with firms of all types hiring people with all kinds of skills. But we can and likely will do better. The Bureau of Labor Statistics reported that in November, the number of job openings rose solidly. The rate of openings has now reached the highest point in nearly 14 years. Basically, there are an awfully lot of open recs for positions, despite the fact that hiring has ramped up. But with the number of openings surging by over 20% over the past year, the 9% increase in hiring could not keep up. Part of the problem may be the continued unwillingness of workers to leave their jobs. While the number of people quitting was up nearly 7% over the year, the quit rate is not much different than where it was during the early part of the recession.
If job gains are to accelerate, the small business sector will have to play a major role and that is a real possibility. Small Business optimism jumped in December to its highest point since October 2006. The percentage of owners thinking it is a good time to expand soared and is finally approaching more typical expansion levels. Similarly, hiring and compensation plans are nearly at normal levels as well.
Finally, the December Conference Board Employment Trends Index was released yesterday and it rose sharply. Over the year, the index increased a robust 7.5% and the gains accelerated in the fourth quarter. That too points to better job growth ahead.
MARKETS AND FED POLICY IMPLICATIONS: The likelihood is that the strong job gains we have been seeing will continue and may even ramp up. Ultimately, those openings will have to be filled. Right now, hiring, despite the solid payroll increases, is not as strong as it can be. Small businesses are saying that they cannot find qualified workers, but they are at a point where they will have to either raise wages more and/or expand their employee search activities. Meanwhile, if you talk to employment services firms, you discover that large companies are still dithering over their hiring decisions. They haven’t figured out that the longer the wait the more candidates they lose. Many companies still think they are living in a world of unlimited supply where they can pick and choose employees as they please. That reality is disappearing, as witnessed by the huge number of openings, but clearly not enough to change behavior significantly. It is only a matter of time. And time is what the Fed seems to think it has. I still believe that wage pressures are being artificially dampened and when they break out, the increases will be rapid. But I have been saying that for a while now and it has not come about. That only tells me that the pressures may be even greater than I thought and if they are, the Fed will once again find itself behind the curve.
KEY DATA: Openings: +149,000; Year-over-Year: +838,000; Hires: -20,000; Year-over-Year: +543,000/Employment Trends Index: +0.4%; Year-over-Year: +6.1%/NFIB: +2 points
IN A NUTSHELL: “The November job gain may have been a bit excessive, but there is little doubt that business hiring is accelerating and it needs to ramp up even more.”
WHAT IT MEANS: Now that “jobs, jobs, jobs” has taken its place in the trash heap of political slogans and we are switching to “wages, wages, wages”, it is critical to understand how great the pressures are on businesses to increase labor compensation. It looks like employment cost pressures are building and the dam that is holding it back could be breaking soon. Two indicators of the condition of the labor market were released yesterday and today. The Bureau of Labor Statistics’ closely watched Job Openings and Labor Turnover survey (JOLTS) showed that openings continue to increase. Since October 2013, unfilled positions have increased an incredible 17.5%. In part that is due to the failure of businesses to fill those positions. Private sector hiring lagged by nearly 300,000 workers over the past year and actually eased a touch in October. As a consequence, we are back to a job openings rate that we haven’t seen since the dot.com bubble began bursting in 2001. Employees are quitting their jobs at growing numbers, though in fits and starts. The level was down a touch in October but is still up over 12% from last year.
A second measure showing that the labor market is tightening is the Conference Board’s Employment Trends Index, which rose solidly in November. The index is closing in on the last expansion’s high reached in early 2007. Also, the National Federation of Independent Businesses’ Small Business Optimism Index jumped in November. Expectations soared. It appears that even small company owners are starting to feel better about conditions. These indicators also support the view that the November employment report was not greatly out of whack.
MARKETS AND FED POLICY IMPLICATIONS: The FOMC meets next week and the members have to make some determinations about the tightness of the labor markets and how long they will have to wait before they start seeing sharper wage increases. The large increase in November is hardly enough to create any major worries at the Fed. But just about every conceivable labor market indicator is blinking either yellow or red. So the November wage gain should be taken as a warning that the hoped for – or dreaded, depending on where you sit – faster labor compensation increases may be closer than most believe. The big debate right now is whether the FOMC’s statement will remove the phrase “considerable time”, which has been used to indicate that rate hikes are well into the future. I think the November jobs report has given the Committee the perfect cover to do just that. That would not signal that a rate hike was coming right away. Indeed, several more months of decent wage increases would be needed. But it would provide the foundation for starting the rate normalization process sometime during the first half of next year.
KEY DATA: ADP Jobs: 213,000; Conference Board Help Wanted: -137,200; ISM (Man.): -2.4 points
IN A NUTSHELL: “The economy doesn’t seem to have picked up any steam in September.”
WHAT IT MEANS: We had great growth in the spring but that high rate doesn’t look to have been sustained as the summer ended. Today’s string of September numbers were simply disappointing. The ADP estimate of private sector job gains was okay, but below what we need to have for the labor market to really be strong. Essentially, it looks like it was more of the same. What this means for Friday’s number is unclear. ADP believes that the private sector created about 415,000 jobs in the last two months. The Bureau of Labor Statistics’ first estimate of August private sector payrolls was a modest 134,000 rise. Barring a major upward revision to the BLS August number, to get the two in synch would mean job gains of at least 250,000. As for the ADP report, small and large businesses hired solidly. The softness was in the mid-sized sector. Why? That is anybody’s guess. As an added insult to those of us who think that the labor market is stronger than perceived, the Conference Board reported that online want ads fell sharply in September. The trend is still up but the data are bouncing around an awful lot.
On the manufacturing front, the sector continues to expand solidly, but maybe not as robustly as it had been. The Institute for Supply Management’s September activity index fell led by a sharp deceleration in order growth. Let’s keep in mind that this is a diffusion index and if you reach a high level of orders and stay there, the index actually goes down. The level of the index is still very high, indicating that demand is strong, which can be seen in robust and expanding production. Hiring, though, did moderate. Let’s see now: Orders are flowing in, production is ramping up but job growth is softening. Got it. Maybe the shrinking of backlogs can explain that.
MARKETS AND FED POLICY IMPLICATIONS: The first estimate of third quarter growth will be released at the end of October, so we have a month to wait. It looks like the economy continued on a solid pace during the summer but well off the 4.6% rate posted in the spring quarter. The recent data have provided few signs that the economy is picking up steam. It would be nice to get a few quarters in a row of north of 4% growth but I doubt we will get that for a while. Third quarter growth should be closer to 3% than 4%. But at least the last six months have been pretty good. Growth in the 3.75% range is something we have dreamed about yet people are discounting it. I think that says a lot about how we are evaluating the economy. Meanwhile, investors are waiting for Friday’s employment report and watching Hong Kong and the dollar, so who know if even today’s numbers will matter much. As for the Fed, it still is all about the labor market and that means Friday is the big day. I am sticking to my stronger than expected forecast but the consensus is for something in the 220,000. An average number will keep the pressure off Fed Chair Yellen, but only as long as the other data remain moderate.
KEY DATA: Openings: +94,000; Hires: +92,000; Quits: +48,000; Layoffs: -32,000
IN A NUTSHELL: “Businesses are hiring and people are quitting, two clear signs that the labor market is firming.”
WHAT IT MEANS: There no longer is a question that the labor market is getting better. The focus of attention has shifted to how quickly, since that will determine the speed at which worker compensation increases. One report that has taken on more intense focus is the Bureau of Labor Statistics’ Job Openings and Labor Turnover survey. This report is starting to flash red. Job openings are surging and were the highest since early 2001 – over thirteen years ago! Meanwhile, hiring is also improving and that is back to spring 2008 levels, about six months before the banking meltdown. But maybe the most important number in this report, at least as far as I am concerned, is the quits component. People are actually leaving their jobs, something that has been unheard of over the past five or six years. True, the number of people telling their employers to take the job and, well you know what, is still not very high. But that is changing, maybe the clearest indication that the labor market is getting back to normal.
MARKETS AND FED POLICY IMPLICATIONS: Firms are looking for new employees but they are also having trouble filling the positions: Over the year, openings rose nearly twice as rapidly as hiring. That point was also seen in the National Federation of Independent Business July survey which found that 24% of the respondents had trouble filling openings. Firms are also starting to face the problem that a growing number of workers are simply leaving. I have been warning about this likelihood for over six months now and the data are starting to support the view that six years of treating workers as if “they are just overhead” is going to be paid for by much faster increases in wages and/or benefits than most business leaders have been expecting or planning for. And my argument that the decline in the participation rate is due to longer-term demographic and social issues, i.e., it is structural not cyclical, also implies that labor supply will not keep up with demand and wages will have to rise. The Fed can continue on its current course without creating massive problems for a while. But those who think that rates don’t have to rise until the second half of next year are underestimating the rate of tightening in the labor market. I have the Fed beginning to raise rates in the first quarter of 2015 – my forecast since last December – but for that to happen, the FOMC has to start outlining when it will start reducing its reinvestment of assets and then actually raising rates. Quantitative easing is history. Now is the time for Janet Yellen to tell us where we go from here and how she is going to get us there.
KEY DATA: Openings: +171,000; Hiring: -52,000; Quits: +60,000
IN A NUTSHELL: “Rising openings and increasing labor turnover is another sign that the labor market is improving rapidly.”
WHAT IT MEANS: Despite the robust June jobs report, skepticism about the strength of the labor market remains. And the basis for that uncertainty is valid: Wages continue to rise minimally. That more work needs to be done before firms are forced to start bidding for workers is clear, but that time may not be far off. The monthly reading on job opening and labor turnover was a pretty good one. Jobs openings jumped. Since May 2013, they are up a nearly 20%. Hiring has clearly not kept pace, in part because business leaders are not raising compensation so workers are not coming out of the woodworks to take the jobs. But changes are in the air as the number of people quitting is rising. Given all the uncertainty about the labor market, it takes a lot of guts to leave a job and since last May, there has been a nearly 15% increase in the number of people willingly leaving their jobs.
MARKETS AND FED POLICY IMPLICATIONS: The JOLTS data are my favorite non-payroll numbers and members of the Fed, including Fed Chair Yellen, also watch them closely. I like the quits data the most as it really gets to the heart of the uncertainty that workers have been facing: The inability to get another job. In this world, job security, as I have noted many times before, can be defined as “the ability to walk across the street and get another job”. That is still not readily possible, but the rise in people quitting and the jump in openings provide the basis for my belief that turnover rates could start to increase rapidly over the next six months. Businesses, though, don’t believe that is likely. They still complain about a lack of qualified workers but refuse to raise offers. I call that the Einstein Insanity Defense: They continue to do the same thing, not raising wages, and keep getting the same results, no qualified workers at the prevailing wage. It is as if there is only one curve in the labor market: the demand curve. Business demand workers and workers are supposed to appear magically. But there is a supply curve as well and that means that wages need to rise to attract the needed workers. We will see how long it takes for businesses to recognize that fact. But when they do, wages will jump and those that were slow in seeing that happening, as well the Fed, will have to scramble to catch up.