KEY DATA: Starts: +3%; Permits: -6.2%/ Openings: +87,000; Hires: +137,000; Quits: +135,000/ Phila. Fed: -10.5 points
IN A NUTSHELL: “The rising number of people leaving jobs is a further sign that the labor market is really tight.”
WHAT IT MEANS: Yesterday, the Fed made its first of what will likely be several rate hikes this year. A strengthening economy, rising inflation and significant fiscal stimulus could mean a greater total increase than the members seem to indicate. So, it’s time to get back to economic fundamentals, at least until the full details of the spending and tax proposals are released. First, the housing market is getting better. Earlier this week we saw that the homebuilders’ level of confidence was the highest in twelve years. That optimism led to a solid rise in housing starts in February. The single-family portion of the market did all the heavy lifting as multi-family construction eased. There was a warning in the report. Permit requests dropped sharply and are now running behind starts. We could see a modest, short-term slowdown in construction activity.
The huge rise in payrolls over the past two months has raised the specter of a really tight labor market. Yes, that may sound strange since businesses seem to be able to find the workers they need. But given the reality of labor force growth and the likely further decline in the participation rate as we transition from boomers to Millennials, strong job growth doesn’t look sustainable. According the Bureau of Labor Statistics’ closely followed JOLTS report, job openings rose in January, though not greatly. Much more importantly, the quit rate, which is a proxy for the willingness to tell management to take this job and shove it, is back at the high of this recovery and near the peak seen in the 2000s expansion. In other words, workers are starting to believe that they no longer need a new job before they leave their old one. That’s confidence.
The manufacturing sector has really made a turnaround and that appears to be continuing. The Philadelphia Fed’s current activity index did fall sharply in early March, but that was not a surprise given the huge surge posted in February. The level of the index remains extremely high despite the decline and the details were impressive. Orders are booming, backlogs are swelling, hiring is strong and workers are being worker harder and longer because firms cannot find suitable employees. Over sixty percent of the respondents to a special question said they were experiencing labor shortages. Over forty-five percent said they had to raise wages to attract skilled workers. Sounds like a tight labor market to me.
MARKETS AND FED POLICY IMPLICATIONS: Today’s key numbers centered on the labor market. The growing number of people quitting their jobs and the high percent of firms reporting they cannot find skilled workers and are having to pay up for the ones they get point to a labor market that may be hitting the wall. We are still not seeing that in the overall data, as inflation-adjusted wages are going nowhere. Until real wages start rising faster, overall consumer demand will remain moderate and the Fed will be able to sustain a slow upward path of interest rates. But the Philadelphia Fed and JOLTS report are warnings that businesses ability to hold the line on wages may finally be ebbing. As for investors, all eyes are turning toward the budget process. Today’s budget summary release is just the starting point for the discussion. We don’t have any tax changes or any infrastructure spending information. We may not know until May what the administration wants to do and then Congress has to actually pass something. Simply put, fiscal stimulus is months away.