KEY DATA: Layoffs (monthly): -29.8%; Year-to-Date: -5.8%/Claims: 299,000 (down 14,000
IN A NUTSHELL: ‘It seems that every time we get labor market numbers, we get more indications that the market is tightening.”
WHAT IT MEANS: The turtle is nearing the finish line. The goal is a normal labor market and we can see that coming into focus. Today’s numbers point to firms doing all they can to keep their current workers. Challenger, Gray and Christmas’ November job cuts report was very encouraging as there was a sharp decline from the October pace. That is important since there was a surprisingly large number of layoff announcements in October and it raised some questions about the direction of the market. Those questions look to have been answered. Layoffs are slowing sharply and are on target to hit the lowest level since 1997. That was near the peak of the dot.com bubble when hiring was robust.
Confirming the strength of the labor market was a large drop in new claims for unemployment insurance. This number had surged the previous week but we are back down below 300,000 per week and that is an indication that tomorrow’s payroll increase could be strong.
On a separate note, CoreLogic’s October foreclosure report indicates that the overhang of distressed homes is being whittled down rapidly as there is inventory has fallen by 31% since October 2013. But there are still a large number of houses in process. The pace of foreclosure is slowing but is still quite high. That said, the inventory of delinquent homes is the lowest since July 2008.
MARKETS AND FED POLICY IMPLICATIONS: The slow but steady improvement in the labor market that has marked this recovery continues unabated and now we are facing the reality that the pendulum may finally be swinging away from employers and in favor of employees. We are not there yet, but we are getting there. That is crucial for the Fed since worker compensation seems to be the operative issue for rate hikes. Tomorrow we get the November employment report and I wouldn’t be surprised if the job gains, including any upward revisions, total at least 250,000. I include revisions because they have been pretty large lately and it is important to recognize the full extent of the payroll changes. As for the unemployment rate, it is a good bet to edge down to 5.7%. The labor market is closing in on full employment and should reach it by early spring. That means shortages should be appearing more broadly and at that point, wage increases are likely to follow. The timing is difficult given the change in attitudes of workers, who are still fearful of quitting or changing jobs, and business managers, who believe they should not have to give raises since they haven’t had to for so long. That dynamic, though, creates the potential for a gap up in wage gains when more normal views of job mobility and worker compensation reappear. And if the restraining effect of the foreclosure inventory can dissipate, the housing market would strengthen and that would add further to growth and accelerate the labor market tightening and wage increases.
INDICATOR: September Challenger Layoff Announcements and Weekly Jobless Claims
KEY DATA: Layoffs: down 23.8%; Jobless Claims: 287,000 (down 8,000)
IN A NUTSHELL: “With layoffs nearing a 17 year low and jobless claims at historically low levels, the logical next step is for hiring to surge.”
WHAT IT MEANS: One more day to the jobs report and a couple of indicators are really pointing to a solid increase in payrolls. Let’s begin with the Challenger, Gray and Christmas monthly report on layoff announcements: In September, job cut warnings fell dramatically, hitting the lowest level in 14 years. The third quarter total was down 8.6% from the same quarter in 2013 and it is possible that for all of 2014, layoff announcements will be the lowest since 1997. I guess the simplest thing to say is that companies are holding on to their workers as tightly as possible. The lack of pink slips is showing up at the unemployment office. Jobless claims fell again and when you adjust the level for the size of the workforce, we are at record lows. The number of people receiving unemployment payments is also declined sharply, reaching its lowest level since 2006. While continuing claims are not near record lows, given the extended period that people can receive unemployment insurance, they are really low.
Several other reports were released today. On the labor front, the National Federation of Independent Business found that small business hiring was strong in September, which supports a stronger than expected level of hiring. However, small business hiring generally doesn’t make it into the initial BLS numbers, so don’t be surprised if the September gain, whatever it is, gets revised upward. There was some concern about future hiring as plans to add workers eased. The New York City Supply Managers’ survey indicated that manufacturing activity picked up steam in September after moderating in August. Expectations also rose solidly. And August factory orders were off sharply, basically because of the wild swings we have seen in aircraft orders. Fattening order books means output should expanding.
MARKETS AND FED POLICY IMPLICATIONS: The underlying data on labor market conditions point to a firming in the market. Companies are not cutting workers and as long as growth continues at a decent pace, hiring will have to accelerate. Whether it shows up in the September or October report is hard to say but one of them should be really big. Still, feedback I get from personnel firms are that companies continue to be hesitant about pulling the trigger on hiring. The number of searches is up but placements remain difficult. It seems that executive management is still resistant to expanding payrolls and adding to costs even though line management is begging for more workers. Something will have to give with the question not being what but when. Regardless, today everyone simply watches and waits. Those who like to gamble may do so but keep in mind, the employment numbers can be very volatile. There was no reason to have such a low gain in August and if it was just a seasonal adjustment issue, then we could get some make-up in September. That would imply the likelihood is that the number will surprise on the upside than the downside.