KEY DATA: Productivity: +2.2%; Labor Costs: 1.2%/ ISM (Manufacturing): -2.1 points; Orders: -4.4 points/ Layoffs: 75,644/ Construction: 0%/ Claims: -2,000

IN A NUTSHELL: “The labor shortage is being overcome by solid productivity, even if it worker output gains are slowing.”

WHAT IT MEANS: The shortage of workers puts tremendous pressure on businesses to meet the growing demand by squeezing out more efficiencies from their workforces and it looks like that is happening. Labor productivity moderated in the third quarter, but it was still quite good. Indeed, it was large enough to keep labor costs from soaring. Still, we are not looking at any huge rise in productivity as the gain over the year of 1.3% is nothing to write home about.

The Institute for Supply Management reported that manufacturing activity continue to expand solidly in October, though for the second consecutive month, the pace moderated. If there was a negative in the report it was new orders. There was a surge in the share of respondents that said order demand declined. That is something that needs to be watched. That said, order books did fill a touch faster even with firms getting goods out the door more rapidly.

The number of layoff announcements jumped in October. So far this year, the Challenger, Gray and Christmas measure is up almost 26%, as a number of major firms announced that they were either closing or cutting back significantly. The only good news about that large rise is that the labor is so tight that many if not most of those workers should be able to find other positions.

Construction spending was flat in September, but that came after a strong rise in August. Private sector activity rose modestly but the government cut back sharply. Since September 2017, the value of construction put in place is up a very solid 7.2%. Given the tax breaks, there is not reason to think that nonresidential activity will falter anytime soon, though it is likely the increase for the year will be disappointing.

As usual, jobless claims remained close to record lows as there are no signs that firms are slowing their hiring. Despite the jump in layoff notices, firms seem to be holding on to their current work force as tightly as possible.

MARKETS AND FED POLICY IMPLICATIONS: The ability for an economy to expand is determined by labor force growth and productivity gains and right now, we are growing at a pace well in excess of what those two would predict. That implies either productivity has to rise faster or growth will have to slow. I am not sure how much more firms can load on their workers. There comes a point where even the most risk averse worker decides they have had enough and in this labor market, those employees are likely to be able to find other places to work. The alternative is to raise compensation, but that doesn’t seem to be soaring. I keep hearing anecdotal evidence that firms are starting to trade off higher wages for more responsibility, but the data have yet to indicate that is anything more than an urban legend. Of course, the government may be missing some of the early signs of the new trend and it may take a while to see it in the numbers. I suspect that by mid-2019, labor compensation gains will be at levels that would worry the Fed members. If that is the case, those who are hoping for only one or two rate hikes next year may be disappointed.