KEY DATA: Productivity (2016): +0.2%; Labor Costs (2016): +2.6%; Real Earnings (2016): +1.5%/ Claims: -14,000/ FOMC: “Steady as she goes.”

IN A NUTSHELL: “The Fed thinks the economy is okay and the data seems to support the view that the economy is okay, if you think okay is okay.”

WHAT IT MEANS: Tomorrow we get the January jobs report and if the huge increase in private sector jobs that ADP reported for the month is any indicator, it should be a good one. And it looks like firms will have to keep hiring if they want to expand output, as productivity is barely growing. In the second half of last year, firms did manage to squeeze out more output from their workforce, but for the year, the gain was miniscule. Only twice over the past thirty years has productivity growth been weaker. As a consequence, labor costs continued to accelerate, reaching its highest pace since 2007. Workers didn’t see their inflation-adjusted income increase very quickly, which is one reason so many voters were ticked off.

Businesses are going to have to make due with their workforces as the labor market continues to tighten. Jobless claims fell and are once again back to record lows. Challenger, Gray and Christmas reported that layoff notices, while up from December, were down nearly 40% from January 2016. Firms are holding onto their workers because they cannot find replacements. The Conference Board’s Help Wanted On Line measure rose in January. It had been declining for much of last year but starting in early fall, it stabilized and is now rising. And the Institute for Supply Management’s manufacturing employment index jumped in January. It is pointing to strong job gains, which supports the numbers that ADP reported. In other words, all the employment data released over the past few days point to a strengthening labor market.

MARKETS AND FED POLICY IMPLICATIONS: As expected, the Fed did not change the funds rate at the FOMC meeting that ended yesterday afternoon. The statement, though largely unremarkable, did make it clear that the members thought the economy was in decent shape. More importantly, instead of saying that inflation “was expected” to rise to 2% in the medium term, the members now believe that inflation “will” rise to that level. That may seem small but it shows that the Fed is now confident that their inflation target is in sight. If both the inflation and unemployment targets pretty much at hand, there is little reason for the Fed to continue standing pat for much longer. I have them raising rates in May, barring some unforeseen craziness that would upset the growth trend, such as a tariff.

So, where do we stand going into tomorrow’s employment report? The labor market is tight, the economy is solid but productivity is moribund. The productivity weakness is major threat to the hopes that the economy can grow at even a 3% pace let alone the hugely optimistic 4% rate that so many in the administration need to make their numbers work. With the labor force expected to expand at less than 1%, productivity would have to increase by 3% or more to get to that upper level. But this far into an expansion, that rarely happens. While you never can say never, basing economic and tax plans on a number that has a low likelihood of occurrence is not a particularly responsible thing to do. But I guess using the word responsible in reference to anything in Washington doesn’t make much sense either.