KEY DATA: ADP: +250,000/ Layoffs: 32,423/ Claims: +3,000
IN A NUTSHELL: “If this is not a tight labor market, I don’t know what is.”
WHAT IT MEANS: Tomorrow is employment Friday and it will provide us with another reading not just on job gains but also on wages. But first we need to see if demand for workers is holding up and it looks like that is the case. ADP’s reading on private sector job gains for December came in well above expectations. The increases were robust in both small and mid-sized business, while larger firms added jobs solidly. Looking across industries, only the information services sector posted a decline. Construction, manufacturing, professional and business services, trade and health care all added lots of new workers. In other words, the labor market is in great shape.
A clear indicator of how tight the labor markets are is the Challenger, Gray and Christmas job cut report. December layoff notices were modest and the total for the year was down by over 20% from the 2016 pace to the lowest level since 1990. Helping out was the rise in energy prices and the energy sector’s stability accounted for almost 90% of the difference in layoff notices over the year.
Jobless claims edged up last week and the level is a touch elevated. That is odd given the lack of job cuts and the high demand for workers. Still, when adjusted for the size of the labor force, the level remains quite low. Firms are simply not cutting their workforces.
MARKETS AND FED POLICY IMPLICATIONS: The Fed members have been puzzling over whether the labor market is at or near full employment. The extent of slack, if there is any, is critical because more rapidly rising wages would put pressure on prices, forcing the FOMC to hike interest rate faster and greater than the markets expect. Well, the data seem to indicate the labor market is really tight. Layoff notices are near record lows, as are unemployment claims. The need to hold on to their workers is also helping the job growth numbers. Keep in mind, monthly employment changes are the difference between payroll increases and decreases and those can occur for any reason, including hiring, firing, business births or business deaths. When the job cut numbers are low, it allows for the job increases to be higher as it reduces the number of people looking for jobs as well as job openings. Think of what the job openings would be if firms were more aggressive in their firings. I would be surprised if tomorrow’s report shows anything near what ADP says were the job gains, but it should be a good report nonetheless. But I will be watching the unemployment rate and hourly wage data. If the rate declines and wages rise faster, which is likely, the Fed is going to start worrying about wage inflation. Jerome Powell may not be taking over with the same level problems that either Ben Bernanke of Janet Yellen faced when they assumed the Fed’s reins, but he still could be in for a very difficult time. The markets are not expecting more than a couple of rate hikes this year but more and more economists, including myself, think that there will be at least three and possibly even four. Investors have been looking past interest rate moves. They didn’t expect the three we got last year but passed them off as irrelevant. If we get another three or four this year, will they continue to be so bullish?