KEY DATA: ISM (Non-Manufacturing): -1.5 points; Employment: +1.1 points/ADP +230,000/Help Wanted: +11,700
IN A NUTSHELL: “The electorate may be disappointed with the economy but the numbers are pointing to accelerating growth and a tightening labor market.”
WHAT IT MEANS: The Democrats got shellacked yesterday and massive discontent with the economy was a key reason for the rout. But politics is politics and it often has little to do with reality. In this case, there are reasons voters are correct and reasons they are wrong. First, the wrong. Basically, economic activity continues to rise. The Institute for Supply Management’s Non-Manufacturing Index fell in October, but it remains at a level that is consistent with solid to strong growth. Importantly, especially with the October employment report coming out on Friday, the employment index continues to break out on the upside. Few firms are cutting back and more are hiring, a good sign for workers. New orders continue to grow, but a little less briskly, while production has come down from outer space to the stratosphere. In other words, everything is moving ahead quite strongly, though maybe not at break neck speed.
Where the electorate was right, was their feeling that their own economic conditions are just not great. As I have said, ad nauseam, it is hard to spend, or feel good about things, if your income is going nowhere. But that could change soon. The labor market is tightening at a rapid pace, and it looks like we get confirmation of that on Friday. ADP’s estimate of private sector payroll gains came in higher than their number for September and that could mean we will see a very strong October job increase. The strong rise occurred despite an almost nonexistent rise in large-business hiring. This sector had been strong for quite some time, so I don’t know what went on. A firming labor market was also supported by a solid rise in the Conference Board’s Help Wanted OnLine Index. Firms are looking for lots of people and I suspect they are also hiring a lot more workers.
MARKETS AND FED POLICY IMPLICATIONS: The sour view about the economy expressed by voters makes sense when you consider that few have seen their wages rise and many have seen their benefits cut and their copays surge. The only thing that will change that situation is a labor market that forces firms to bid for workers. Each month, we see more and more signs that labor shortages are starting to appear. We are approaching full employment nationally, but in some areas, industries and occupations, that condition already exists. It’s just that shortages need to be more widespread before wage gains will accelerate and benefit cuts will be reversed. I suspect by the spring, the intransigence toward paying more will fade as job openings become so great that firms have no choice but to start raising offers. We are not there yet, but the Fed members need to recognize that a rising wage environment is not that far away. As for investors, any euphoria over the election results may have to be tempered by the simple fact that being in power means you have to actually try to govern, something that neither party has bothered with lately.