KEY DATA: Productivity: +2%; Year-over-Year: +0.9%; Unit Labor Costs: +0.3%; Year-over-Year: +2.4%/Jobless Claims: 278,000 (down 10,000)
IN A NUTSHELL: “As the labor market continues to firm, there are growing hints, but still just hints, that wage pressures are starting to build.”
WHAT IT MEANS: Okay, the election is over and we will have to wait until January for the new Congress to start creating whatever chaos they want to create, so let’s get back to economic reality. Businesses are doing what they can to keep labor costs down and in the summer, they pretty much succeeded. Third quarter productivity gains almost completely offset labor compensation increases. That led to a modest rise in labor costs, which is good news for prices. These data are wildly volatile, so it is worthwhile looking at the changes over the year. Since the third quarter of 2013, productivity rose modestly while labor costs were up fairly solidly. And, for the first three quarters of the year, productivity increased by less than 1% while, labor compensation rose by 3.1%. Even adjusting for inflation, compensation is up by 1.3% so far this year. It is possible that inflation-adjusted earnings could rise at the fastest pace since 2007. That is a clear sign that the tightening labor market is forcing firms to pony up a little more money.
There were other data on the labor market, but they were more mixed. Weekly jobless claims dropped solidly and the four-week average remains at historically low levels. However, The Challenger, Gray and Christmas layoff announcement report jumped in October to its second highest level this year. It was noted that October and November tend to be big months for layoffs as firms set business plans, so we should probably wait and see how the rest of the year plays out. Also, we really don’t know where those cuts will come or if they will even take place. That said, layoff notices are down by over 4% so far this year.
MARKETS AND FED POLICY IMPLICATIONS: Firms keep pushing their workers harder and harder as they hold back both their hiring and compensation. But the dam seems to be breaking. Productivity gains this year will probably be in the one percent range, making it four consecutive years of modest increases. With compensation rising, there is pressure on margins and firms are worried about paying workers even more. But it’s the tightening labor market that will likely be the driving force in 2015 and that means either firms will have to start raising prices or shrinking margins. Most likely we will see a little of both. But that doesn’t mean earnings have to weaken. If economic growth is above 3%, as I believe it will be, companies will have to make it the old fashion way, through volume. Are investors thinking about the implications or modest productivity gains and rising labor costs? Probably not, as the headlines don’t shout rising wage pressures. But the Fed members know the devil is in the details and they say a lot. Regardless, tomorrow is Employment Friday and we will see what happened with October payrolls and the unemployment rate. I expect job gains to be well north of 250,000 while the unemployment rate remains at 5.9%.