KEY DATA: Openings: +472,000; Hires: -86,000; Quits: +136,000/ NFIB: +0.1 point
IN A NUTSHELL: “Businesses are optimistic and looking for workers, it’s just that they don’t seem to be available.”
WHAT IT MEANS: Another day, another set of good numbers. Let’s start with the labor market. The closely followed JOLTS report, which provides data on job openings, hiring, layoffs and quits, indicated that businesses are looking for workers in just about every nook and cranny of the economy. The total number of job openings hit the highest levels since the report was first released in December 2000. There was a decline in durable goods manufacturing unfilled positions, but that may have been due to the surge in hiring that has taken place this year. Openings were up in every region of the nation. My favorite number in this report is the quit rate, which provides some information on the willingness of workers to leave their jobs. For a long time after the end of the Great Recession, people were fearful and refused to leave positions. It looks like the fear is fading as the quit rate continues to rise. A rising churn in the labor market would likely force businesses to raise compensation faster either to retain workers or replace those that have left. We haven’t gotten to the point where the quit rate would signal surge in wages, but it is getting there.
We all like to talk about the importance of the small business sector in driving economic growth and if we are at all correct, then there is good news for the economy. The National Federation of Independent Business’ April survey showed that small business owner confidence remains extremely high. The index may have only edged up over the month, but it “has been higher only 20 times out of the last 433 surveys”. In other words, we are talking about exuberance. Earnings are at record levels, but the lack of qualified workers is also causing compensation costs to rise faster, which is driving up prices. That is, we have both wage and price inflation at the small business level, something that will surely catch the eyes of the Fed members. The best description of this report is the comment made by NFIB Chief Economist Bill Dunkelberg: “There is no question that small business is booming”.
MARKETS AND FED POLICY IMPLICATIONS: Today’s reports contain both good news and bad news for investors and the Fed. They clearly point to a strong economy that is generating profits for businesses of all sizes. But it is also putting greater pressure on wages and prices, which is why we are seeing the steady rise in inflation. For the monetary policymakers, that means the economy can withstand further rate hikes, which may be needed to moderate the building inflationary pressures. And that is the worry for investors. Large, publicly traded companies are employing most of the tax reductions on stock buybacks, dividend increases and mergers and acquisitions. As of yet, they have not invested heavily in new capital. Unless capital spending picks up, productivity will remain in the doldrums and costs will rise, providing an additional reason for the Fed to continue normalizing rates. How high will interest rates go? It is unclear right now, but there is a very high likelihood they will max out well above what most investors expected as little as six months ago and higher than many still believe will be the top.