KEY DATA: ADP: 227,000/ HWOL: -267,300/ ECI (Over-Year): 2.8%; Private Sector Wages: 3.1%
IN A NUTSHELL: “Wage gains are finally accelerating, but that doesn’t seem to be slowing down hiring.”
WHAT IT MEANS: On Friday, the October employment report is released but today we got some other very important labor market data. Since it is Wednesday, that means ADP provides its estimate of private sector job gains in October and it is possible we will get a much bigger increase than expected. Robust hiring in medium and large businesses drove ADP’s guess of a strong payroll increase. Meanwhile, small companies, which generally lead the way, instead lagged behind. It may be that larger firms can pay the rising wages we are seeing, so they can attract the workers needed, some from the smaller companies. As for industries, there were no negative numbers in the report. That doesn’t happen all that often.
While firms are hiring heavily, they don’t seem to be willing to advertise for workers as much as they had been. The Conference Board’s measure of online want ads declined sharply in October. The data have been volatile for about three years now, but the trend seems to be down. There were declines across the entire country and in every one of the top ten occupations. In other words, the weakness was universal. The online want ads may not be providing valuable information right now as it is unclear if the drop was due to a lowered need for workers or lowered expectations about finding suitable workers.
The tightening labor market is finally causing firms to raise wages. Private sector wages and salaries rose sharply in the third quarter and the increase over the year was the highest since second quarter 2008. Surprisingly, benefit cost inflation moderated. Firms have been saying they are trying to hold the line on salaries but are willing to increase benefits, but that is not what the government is showing.
MARKETS AND FED POLICY IMPLICATIONS: The ADP forecast can be off by a lot for any individual month, but the data do follow the trend quite well. What the employment services company series seems to be indicating is that there is no fall off in hiring despite the low unemployment rate and the constant complaining about a lack of qualified workers. I suspect the government’s numbers will come in below what we saw today and my estimate is around 180,000. But I would not be surprised if the unemployment rate falls and the hourly wage gain comes in higher than expected. Those data points are what the Fed watches carefully. The labor market is extremely tight and the flat participation rate points to a further ratcheting up of wage gains in the months to come. Given that the government’s data point to accelerating wage inflation, it is likely that next week the FOMC will signal it will be raising rates in December.