KEY DATA:  Starts: +6.3%; 1-Family: +6.3%; Permits: -5.1%; 1-Family: -6.3%/ Phil. Fed (NonMan.): -6.5 points; Orders: +4.4 points

IN A NUTSHELL: “Home construction remains strong, mirroring the economy.”

WHAT IT MEANS:  This week, there are few economic reports and most center on housing.  It looks like the home building sector remains in good shape.  Yesterday we saw that the National Association of Home Builders’ index eased back slightly in July as traffic slowed.  But the outlook for sales over the next six months improved.  Today’s report on June housing starts and permits was solid, as new construction activity picked up sharply.  The gain was evenly distributed between single-family and multi-family projects.  However, permit requests declined.  That is not a great issue as permits were above starts for the previous fifteen months.  Builders have a backlog of permits to work off and they are starting to do that.  You can see that in the number of units under construction, which hit its highest level in fifteen years. 

The Philadelphia Fed’s July survey of nonmanufacturing firms fell, but as is often the case, the headline number doesn’t tell the story.  First, the level remains high.  But more importantly, demand and hiring picked up.  Also, compensation costs are accelerating, and firms are raising prices more rapidly.  The issue of labor costs was the focus of this month’s special questions.  Over forty-four percent of the respondents indicated that they were raising wages more than planned and the median wage increase is now expected to be between three and four percent.  Expected wage, health and nonhealthy benefit costs are projected to rise by four to five percent.  This must be putting pressure on earnings.IMPLICATIONS:  Today, the economic data are not the major focus of investors.  Yesterday’s sell off is, and from the look of things, it is being matched by a sharp rise.  The wild gyrations in equity prices are indications investors are skittish about where we are going – and there is good reason for that to be the case. The Delta variant has taken over and it is spreading rapidly.  At the same time, vaccinations are falling and there is now a growing and vocal anti-vaccination movement.  Last summer, there was a lull, only to be met by a massive rise in the winter.  It is unclear what will happen as we move out of the warm weather into the cold.  Shutdowns are not expected, but health concerns, especially for children, could become an issue.Adding to uncertainty is the looming reduction in stimulus funds.  Over the past year, investors have looked past most of the problems and they were rewarded.  The big difference between now and last summer is that the stimulus was adding massively to both household and business spending and the prospect was that it would continue.  That is not the case now.  That said, President Biden’s first budget is filled with new spending and that could offset the loss of the stimulus funds.  Consequently, investors have reason to be uncertain, but also hopeful.  That points to further volatility ahead, so fasten your seat belts.

KEY DATA:  CPI: +0.9%; Over-Year: +5.4%; Ex-Food and Energy: +0.9%; Over-Year: +4.5%/ Real Hourly Earnings: -0.5%; Over-Year: -1.7%/ NFIB: +2.9 points

IN A NUTSHELL: “Inflation and optimism are sky high, but spending power is cratering.”

WHAT IT MEANS: One of the greatest concerns, at least for consumers, is that inflation is soaring.  We saw again today, just how great a problem that is, at least right now.  The Consumer Price Index surged in June.  On a year-over-year basis, the rise was the second largest in nearly thirty years, beaten out by the gasoline price surge in 2008.  Excluding food and energy, you must go back to November 1991 to see any annual price increase greater.  Clearly, there are some special factors at work.  Used vehicle costs are up by 45% since last June, as the global supply chain is not working well.  Gasoline and fuel oil have also skyrocketed by a similar amount.  But while eating out is a lot more expensive, eating in costs have been tame, though that has been changing in the last few months.  Interestingly, health care costs, both goods and services, have been a restraining inflation.  Normally, it would be leading the way up.  Also, despite the surge in home prices, shelter expenses have been increasing at a moderate pace.  We need to be cautious in jumping to any conclusions about the yearly rise in consumer prices due to the price declines created by the shutting down of the economy.  That said, Since March 2020, before the pandemic impacts were felt, the headline index is up 5% while the core (ex-food and energy) has risen 4.2%.  In other words, inflation is soaring, and it is not just a statistical anomaly.

The problem for households is that their incomes are just not increasing nearly as rapidly as their expenses.  Adjusting for inflation, hourly wages fell sharply both over the month and over the year.  People are working more now but enjoying it less.

Despite the inflationary pressures on costs, small businesses are exuberant.  The June National Federation of Independent Business’s index rose solidly and the level is nearing the peaks seen after the 2016 election and the passage of the tax cuts.  But firms are having major problems filling open positions, raising costs and forcing firms to increase prices.  The percent raising prices hit its highest level since 1981 and no one who lived through that time period wants to go through that again.     IMPLICATIONS: “The heat is on, it’s on the street” and the question is, will the Federal Reserve cops (yes, that is the song from Beverly Hills Cops) keep smiling and saying that transitory factors are driving the rise and they will dissipate and everything will be beautiful sometime in the future, whenever that sometime will be? But for workers, the surge in consumer costs is eating heavily into their spending power.  That is happening as states are trimming their unemployment compensation and the supplementary payments will terminate nationally in September.  Where households will get the money to keep spending as we move through the later portions of this year and into next is anyone’s guess.  While the strong job gains mean overall income will continue to increase, high or even moderate inflation, coupled with mediocre wage increases could limit consumption for those already working, and that is the bulk of the workforce.  But investors seem to think the Fed is totally correct that inflation will fade to trend and therefore don’t seem to be adding that issue to their decision making.  Given the markets tend to be cynical about Fed forecasting, to me this attitude looks like cherry picking those things that help keep the market going and discounting anything that doesn’t support that view.  That approach could persist for quite a while as we have no idea what the time frame the Fed has in mind when it says that inflation pressures are transitory.

KEY DATA:  ISM (NonManufacturing): -3.9 points; Orders: -1.8 points; Employment: -6 points; Backlogs: +4.7 points/ ETI: +2.14 points

IN A NUTSHELL: “The easing of activity in the nonmanufacturing segment of the economy may be due more to labor issues than demand.”

WHAT IT MEANS: From all accounts, it looks like the summer party is on.  Mobs of people are out and about and seemingly spending money like crazy.  Yet the Institute for Supply Management’s NonManufacturing index fell solidly in June.  Are our eyes deceiving us?  Probably not.  So, what is going on?  Well, in today’s report, the details were mixed.  On the concerning side, business activity was off sharply.  There was a major rise in the share of firms reporting a decline in activity.  However, on an absolute basis, the level of the overall index and business activity are both quite strong. It is just that there were record highs set during the previous three months. Another negative component was employment.  But the problem here is that firms cannot find workers, not that they don’t need workers.  Finally, there was a huge rise in backlogs, as supplier deliveries are continuing to slow at a rapid pace.  That points to an inability to meet growing demand.

Doubts about the labor market should have been removed with the strong June employment report released last Friday.  Yes, there was an aberration in the government numbers, but the private sector did add a ton of new workers.  And today, the Conference Board reported that its Employment Trends Index rose solidly in June and level is back to where it was before the pandemic hit, when businesses were trying to cope with a lack of workers.  As the report noted, “A tight labor market is likely to be the new normal until the next recession.”IMPLICATIONS:The severe labor shortages are almost certainly muddling the economic data.Add to that supply chain problems and it is clear that while some data look as if they are pointing to a slowdown, what may be the case is that bottlenecks are creating output issues.  The problem is that when demand exceeds supply, there is a tendency for prices to rise.  At least that is what economists like to claim.  And in this case, we are indeed seeing that.  Unfortunately, we really don’t know how long the bottlenecks will continue to constrain activity.  On the microchip front, it is hoped that conditions will start easing over the second half of the year, but some sectors could see problems for another year or more, at least that is what some analysts are indicating.  That is important because the lack of chips has greatly affected U.S. manufacturing, especially vehicle production. Over the past year, the prices of used vehicles have risen faster than any other component of the Consumer Price Index except energy.  On the labor front, we could see an easing of the shortages when the supplemental unemployment compensation payments disappear, but it is unclear how much that will help given the need created by the reopening of the economy.  The Conference Board’s comment about being in a tight labor market until the economy crashes again is likely to prove prescient. Pressure on wages and signing bonuses will not likely disappear soon and that brings up the question I always ask:  If the current price and wage pressures continue for an extended period, to what extent will they become embedded in expectations?  It is hard to argue that there will be no impact, but that is what the Fed seems to be counting on.Let’s hope the Fed members are correct.  Otherwise, monetary policy will have to change a lot quicker than the markets currently expect.  That said, we are likely at least a year away from that possibly happening.

KEY DATA:  Jobs: +850,000; Private: +662,000; Leisure and Hospitality: +343,000; Unemployment Rate: 5.9% (Up 0.1 percentage point)/ Trade Deficit: +$2.2 bil.; Exports: +0.6%; Imports: +1.3%

IN A NUTSHELL: “Strong growth in payrolls reflect the reopening of the economy, but the failure of the labor force to grow strongly is a real concern for businesses.”

WHAT IT MEANS: Another jobs report, another sign that the economy is getting back to more normal conditions.  Payrolls surged in June, which should have surprised nobody.  The removal of restrictions is allowing firms to rush out and hire, if they can, new employees.  The increases were in the sectors that were expected: restaurants and hotels, and because firms cannot find workers, temporary employment services.  Retail hiring was also solid.  There was also a huge increase in government hiring, all in education.  Don’t expect that to be repeated.  But otherwise, the numbers were mediocre.  The manufacturing, health care and transportation sectors added a modest number of workers and construction was down.

On the unemployment front, the rate rose modestly.  But the labor force is not growing nearly as rapidly has expected: The participation rate was flat over the month and up modestly over the year.  As a result, wages rose solidly. 

The trade deficit widened sharply again in May.  While exports increased, the reopening of the economy is sucking in goods from the rest of the world at a massive pace.  The deficit should continue to widen as the U.S. economy is expanding faster than most of our trading partners.  However, adjusting for inflation, it doesn’t appear as if trade will restrain growth significantly in the second quarter.  IMPLICATIONS:The headline employment number was impressive, but as usual, when you look at the details, there was less there than meets the eye.  Much of the job gain came from the leisure and hospitality sector.  The total number of workers in this segment of the economy remains about 2.2 million below the peak set in February 2020.  But it has recovered about six million of the 8.2 million of the jobs lost due to the shutdowns and it is unclear how many more jobs will be recovered.  Undoubtedly, a large number of positions were lost due to firms disappearing and it will take years to regain those jobs.  So, look for the leisure and hospitality sector to add workers at a decelerating pace as we move through the summer and into the fall.  In addition, the pattern of hiring in the education sector was upset by the pandemic, so the seasonal adjustments may be off.  Don’t be surprised if that sector stops adding workers for a while.  On the other hand, construction looks to be strong, so we should see a rebound there.  Still, with education and leisure and hospitality accounting for about two-thirds of the June payroll gain, the outlook is for a lot slower job gains in the months to come.  There is also some concern over the limited rise in the labor force in the face of growing labor shortages.  Some of that may be due to altered seasonal factor that will wash out as the year proceeds.  But the real question is what extent the expanded unemployment compensation has kept people on the rolls for an extended period?We should start seeing over the next few months if that was the case as states are eliminating those extra payments and they end in September.  That could lead to a jump in those looking for jobs, though don’t be surprised if it also leads to a minimal decline in the unemployment rate.  It takes time to find a job and a surge in job seekers usually leads to a rise in the number of workers unemployed, at least for a period of time.  To summarize, the labor market is getting better, but don’t expect massive jobs gains to be repeated and don’t be surprised if for a while, the unemployment rate makes little progress in returning to full employment.  That is just the way things work.  What we should watch closely is the cost of labor.  If wages keep rising sharply, firms will have to continue passing those expenses on to consumers.  That would lead to an extended period of above trend inflation and if it runs through next year, which I think is possible, the Fed may be forced to move sooner rather than later.

KEY DATA:  ADP: +692,000; Hospitality: +332,000/ Pending Sales: +8%; Over-Year: +13.1%

IN A NUTSHELL: “The reopening of restaurants is driving the demand for labor and that should continue for a few more months.”

WHAT IT MEANS:  On Friday, we get the government’s June employment report, so Wednesday of the same week means ADP releases its estimate of private sector payroll gains.  It looks like we are in for another big increase.  The largest gain, not surprisingly, should be in the leisure and hospitality, as restaurants and hotels are moving rapidly toward full service again. But that was not the only strong sector.  Health care hiring soared as did construction.  That was expected, though the health care rise was somewhat outsized.  The job increases were also evenly split across firm size, which shows that the small business sector is coming back to life as well.  Finally, the ADP estimate and the consensus of economists for Friday’s jobs report are very much in line.  Either we are all wrong, a very real possibility, or for once we all got it right.  

Spring was not the greatest time for home sales as inventory restrained activity.  That may be changing.  The National Association of Realtors reported that pending home sales rebounded in May and every region posted a solid rise.  While demand remains strong, the improvement in sales may be coming from homeowners who cannot pass up the large rise in prices.  Inventories are beginning to increase, though they are still way too low given the level of demand.     

KEY DATA:  Confidence: +7.3 points; Present Situation: +9 points; Expectations: +6.1 points/ Case-Shiller (National): +2.1%; Over-Year: +14.6%; FHFA: +1.8%; Over-Year: +15.7%

IN A NUTSHELL: “The exuberance is spreading as both confidence and home prices continue to rise sharply.”

WHAT IT MEANS:  Happy days are here again.  The economy is largely reopened, job growth is strong, confidence is surging and if you are selling your home, it’s nirvana.  And today’s reports only add to the belief that the recovery is going full force.  The Conference Board reported that consumer confidence jumped in June, with the view of both expectations and present conditions increasing solidly.  The confidence measures had been improving at a pace that was disappointing, but it appears that could be changing. 

The housing market has gotten out of control, at least when it comes to prices.  Both the Case-Shiller and Federal Housing Finance Indices rose sharply in April and over the year, the gains are becoming scary.  When you are talking about increases that average in the 15% range with some regions posting gains over-the-year approaching or even exceeding 20%, you have to think bubble.  The Fed is intent on keeping longer-term rates down, so low interest costs are offsetting, to some extent, the higher prices.  How much longer that can continue is unclear, as affordability is deteriorating.   IMPLICATIONS: The economy is in getting back to normal, but inflation remains the great unknown.  Normally, facing the sharp acceleration in prices of just about everything and growth at levels that are two to three times trend, economists and the Fed would be putting out the warning signs that something should be done.  That something, of course, would be rate hikes.  But that is not likely happening for a year or more.  Yet the bond and equity markets are seemingly dismissing the possibility of an extended period of high inflation.  One major reason is that the strong growth is being driven largely by government stimulus funds.  As the income numbers show, wage and salary gains are mediocre.  Once the money runs out, growth is likely to moderate and once the economy is largely reopened, the income increases from payroll gains will also fade.  Also, the year-over-year numbers are suffering from the pandemic impacts on costs, and that too should start disappearing.  But the factors that should lead to lowered inflation mean more moderate growth, and that doesn’t seem to be a part of the thinking of investors.  Finally, there is the question I have been asking: Will the new-found pricing power be extended further into the future than most analysts expect?I think it will and we could have elevated inflation not just this year but next year as well.  While that may not sound terrible, two years of high inflation could change the long-term outlook for inflation, unmooring inflation-expectations.  Investors might consider asking what the markets would look like if trend inflation shifts from an average of 2% to maybe 2.5%?  It would certainly change the outlook for interest rates.

KEY DATA:  Consumption: 0%; Disposable Income: -2.3%; Prices: +0.4%; Over-Year: +3.9%; Ex-Food and Income: +0.5%; Over-Year: +3.4%/ Sentiment: +2.6 points

IN A NUTSHELL: “The economy remains on track, despite some of the craziness in the data.”

WHAT IT MEANS:  Once again, we run into the problem of separating the headline number from the trends and the details.  Today’s data may look ugly but that is just not the case, at least when it came to income and consumption.  Yes, flat May consumer spending was nothing to write home about.  But there was a large decline in durable goods demand that can simply be explained by the drop in vehicle sales from an unsustainably high April pace.  The May annualized rate of vehicle sales was actually pretty good.  Also, services spending rose sharply, indicating consumers are back out doing the things they had given up during the pandemic.  As for income, the decline was the result of the changes in flows of government assistance.  Wage and salary gains were fairly normal – decent but not great.  As for the inflation numbers, they were troublesome.  The headline and core price measures, which excludes food and energy, were up sharply and the change from 2020 accelerated once again.  But even here, there are some special factors.  The shortage of vehicles, in the face of strong demand, has led to a surge in vehicle costs.  That should settle down once the chip supply problem is eased.  And I doubt we are going to see the surge in energy costs, which were up over twenty-seven percent since May 2020, repeated.  Inflation should settle down, but as I have noted before, what really matters is where it settles down to. 

Consumer confidence will play a major role in determining the strength of future spending decisions and it picked up a touch in June.  However, the rise in the University of Michigan’s Sentiment Index was nothing special.  Most disconcerting was that the entire increase came from sharply rising expectations, as the current conditions measure declined.  With so many states ending restrictions, it is hard to understand why people think growth is moderating, but that seems to be the case.IMPLICATIONS: Given that the federal government has been controlling income and state governments handling the reopening of the economy, it should not be surprising if there are some major ups and downs in the economic numbers.  Consequently, we really don’t know the extent to which the private sector will be picking up the slack that ultimately will occur when the stimulus funds run out.  That uncertainty is something the markets and especially the Fed will have to live with.  The markets see no evil and are reacting accordingly.  The Fed, though, is somewhat unsure.  There are no clear signs that the monetary authorities want to end the bond-buying stimulus and that is good for the markets.  But the massive additions to liquidity seem totally unnecessary, unless the members don’t know what the economy will look like once the private sector must stand on its own.  So being cautious makes sense.  It also makes sense if the Fed truly believes that once the current global supply chain issues are resolved, inflation will eventually return to its desired trend rate. There appears to be a total discounting of the idea that the current pricing power could be sustained.  Will firms get use to the ability to keep earnings up by raising prices?  Over the past couple of decades, the fear of raising prices has controlled inflation. The idea that that the same fear will reappear after companies have seen the benefits of price increases may be a wishful thinking.

KEY DATA:  Retail Sales: -1.3%; Excluding Vehicles: -0.7%/ IP: +0.8%; Manufacturing: +0.9%; Vehicles: +6.7%/ PPI: +0.8%; Personal Consumption: +0.4%/ NAHB: -2 points

IN A NUTSHELL: “The consumer is spending, just not as rapidly, as prices continue to soar.”

WHAT IT MEANS:  About once a month we get a data dump and today was one of those days.  The big number was the retail sales report, which provides some insight into consumer behavior.  Households cut back their spending pace in May sharply after spending like crazy in April.  We knew that was going to happen as the April vehicle sales pace was not sustainable.  But even excluding vehicles, demand fell sharply.  The details, though, were really mixed. There were huge declines in purchases of furniture, electronics, building supplies and general merchandise.  However, we bought lots more food, both at home and in restaurants, and sales of clothing, health care products and gasoline also rose.  As for the internet, demand was down there as well.   

Industrial output surged in May as the vehicle sector picked up the pace sharply.  This sector has been constrained significantly by the shortage of chips and that supply problem remains a major concern.  The production of both consumer goods, business equipment and technology products picked up significantly, indicating that demand is expanding across the entire economy.

The cost of production continues to rise dramatically.  The Producer Price Index was up sharply in May and over-the-year, it has risen by 6.6%.  But the details are not quite as distressing – or threatening.  The costs of personal consumption products are not increasing as rapidly as the overall index and that points to high but not huge gains in consumer prices. 

Housing activity eased a touch in early June.  The National Association of Home Builders’ Index declined moderately, led by weakness in the Northeast and West.  Still, the measure is indicating that the market is now only red hot instead of white hot.  Whether that is due to a lack of demand or supply is not clear from these numbers, but all other indications are that it is an inventory issue.  IMPLICATIONS:The Fed is starting its two-day meeting today and the latest data, when taken out of context, would look to be troubling.  Consumer spending declined, the housing sector eased back, and business costs continue to soar.  But those numbers don’t tell the whole story as consumption is still strong and housing remains robust.  The rise in production is a clear sign that growth is not faltering.  But for the monetary authorities, the one concern could be the continued surge in the cost of doing business.  The members want to get the tapering process started and there is every reason to start sending messages that the economy not only doesn’t need any additional help, but could use a bit of moderation.  However, I don’t think they have reached the point where they are willing to say that.  It is not necessarily a fear of another taper tantrum and a market meltdown.  I think the major concern for the Fed is the uncertainty about what happens when the government stimulus funds start to run out.  We are several months away from that point and then it could take at least six months to see how things settle out.The Fed appears willing to accept excessively high inflation for an extended period because it believes inflation pressures are only transitory.  The biggest problem with the sentence I just wrote is that no one has any idea what is meant by “extended period” and “transitory”.  The Fed likes to use words and phrases that are like rice cakes: They seem to have substance but are all air.  Those types of words provide flexibility and gives the members wiggle room.  And until they see that inflation expectations are no longer well anchored, the members will argue they don’t have to do anything.  So, I don’t expect much out of this meeting and tomorrow’s statement and press conference will not likely be that telling.  What needs to be watched are the inflation numbers in the economic projections table.  They were too low in the March report and how much they are raised will provide some insight into the concerns members have for future inflation.

KEY DATA:  CPI: +0.6%; Over-Year: +5%; Ex-Food and Energy: +0.7%; Over-Year: +3.8%/ Hourly Earnings: +0.5%; Inflation Adjusted: -0.2%/ Claims: -9,000

IN A NUTSHELL: “Consumers are being battered by rising retail prices, while labor shortages and surging wages are hitting businesses hard, and there is little reason to think those trends will change anytime soon.”

WHAT IT MEANS:  No good deed goes unpunished and that is the case with the rapid reopening of the economy.  The upside is that growth is soaring.  The downside is that consumer inflation is surging, and labor problems are pressuring businesses.  Today’s data highlight those issues.  Let’s start with the Consumer Price Index, which showed that retail prices jumped again in May.  The solid increases were across the board.  Only gasoline and fuel oil prices fell, and that could turnaround in the June report. Prices climbed for just about everything else except medical services, and thankfully cookies and cakes.  The biggest gain was in used vehicles, which rose by over seven percent and have skyrocketed by nearly thirty percent since May 2020.  The rise over the past year in all consumer prices was the second highest in thirty years and that was also true when food and energy were excluded. 

The increasing costs of goods is not only hurting the consumer at the checkout line, be that online or in the store, but it is also eating into purchasing power.  While hourly wages rose sharply in May, when adjusted for inflation, they were down.  When you add the decline in weekly hours worked, it looks like income gains will be quite weak. 

Business are being battered on two sides: Commodity costs are surging, and labor shortages, which are driving up wages, are cropping up across the economy.  And it looks like things will get worse before they get better.  New unemployment claims fell again last week and given the way the economy is reopening, they should continue to decline for weeks to come.  But as solid as hirings have been, they cannot keep up with the rise in job openings, so firms are hanging onto their workers as tightly as possible.  Thus, layoffs should continue to fall as will the unemployment rate.  That said, it will take a very long to time before the rate, which is currently 5.8%, gets back to the 3.5% just before the pandemic hit.

IMPLICATIONS:  Today’s data show what happens when demand suddenly surges while supply fails to keep up.  The problems in the global supply chain are creating shortages and that is forcing up both producer and consumer prices.  In a normal economy that is growing at trend, the pressure on costs would be elevated by not sky high.  But we are not in a normal economy and the sudden ebbs and flows of growth have created outsized impacts.  Firms love the jump in demand, but they don’t like the fact that they cannot get all the inputs they want, including labor, and therefore they are paying a lot more for their supplies and workers.  On the other hand, the sudden surge in demand is allowing them to pass through those higher costs to end users.  The result is the highest inflation in decades.  Will the elevated inflation rates be temporary, as the Fed thinks or hopes?  It depends upon what you mean by temporary.  Inflation could easily remain above three percent for the next year, especially if the rest of the world recovers more rapidly.  As I have noted before, the key will be inflation expectations.  The Fed members seem to believe that expectations will remain well contained, even in the face of evidence that they are becoming unmoored.  I expect the Fed will be accepting of inflation running well above its 2% average for an extended period, possibly all through 2022.  The rate was almost always below the target for over a decade, so it will take quite a long period of high inflation to bring a medium-term average up to 2%.  But that patience can only be sustained if expectations stay low, so investors should be watching not just the inflation rate but also the measure of inflation expectations.  They should also recognize that the labor shortages will not magically disappear when the enhanced unemployment money runs out.  Wage gains are not going to suddenly flatline.  Thus, businesses will continue to be pressured by rising commodity and wage costs and it will be hard to make it up in volume.  To maintain margins, firms may have to keep raising prices.  But that will accelerate inflation further.  Is wage-price inflation back?  We shall see.    

KEY DATA:  Trade Deficit: $6.1 billion narrower; Exports: +1.1%; Imports: -1.4%/ Openings: +998,000; Hiring: +69,000; Quits: +384,000/ NFIB: -0.2 point.

IN A NUTSHELL: “The only thing keeping job growth down is the ability to find workers.”

WHAT IT MEANS:  Over the past two months, almost 840,000 new positions were added to the economy, and some are calling that weak.  I don’t know what yardstick is being used, but it isn’t weak.  But there is a reason why we haven’t seen even better payroll increases and it isn’t because of a lack of need.  In April, the government’s Job Openings and Labor Turnover Survey (JOLTS) posted its largest number of job openings and the rate of openings also hit a record high.  Nearly a million additional positions went wanting.  That is unheard of.  Businesses are doing their best to hold the line, as hiring rose, though somewhat modestly given the need, and layoffs declined.  However, workers are quitting at a record rate and the level is exceeding hiring.  So, when you add the reopening of the economy to strong growth and rising quit rates, it should surprise few that job openings are soaring. 

Another sign that the labor market is having structural issues was seen in the May National Federal of Independence Business’ report.  Optimism, which should be surging, was down a tick.  But more importantly, the report noted that “May is the fourth consecutive month setting a new record high reading for unfilled job openings.”  Skilled labor is extremely scarce as “Forty percent have openings for skilled workers”.  At the same time, a growing percentage of firms are in the market for workers, so this problem is not going away anytime soon.

On the trade front, the deficit narrowed sharply in April.  That is good news, as fewer dollars flowed out of the economy into foreign economies.  But this closing of the gap is not likely to be sustained, as imports of consumer goods and vehicles fell sharply.  The economy is booming, and the total import drop may have only been due to the outsized 7.5% gain posted in March.  The economy is expanding way to strongly for imports to be declining. 

IMPLICATIONS:  The labor market is facing a set of uncertainties it has never seen before.  Yes, there have been labor shortages before, but not at current levels.  There is government policy that, at least to some extent, has elevated the number of those receiving unemployment compensation.  But maybe most importantly is the issue of reopening offices and whether employees can or will work from home.  Some CEOs may believe that workers should “get over it” when it comes to the commute, but for workers who have a choice of where to work, they just may not want to get over it.  Working at home may be a key factor in retention.  Workers are quitting at record rates and while we don’t know for certain why that is happening, work location is likely a factor.  For those who prefer working at home or a hybrid structure, the demand to return to the office may be a reason to look for other another position.  Just a couple of years ago, we were talking about how Millennials viewed a job as a steppingstone, not a career, so loyalty to a company was not a major factor in employment decisions.  If you add work from home to the mix, we could be in for a major churn in employment.  That is good for workers, as companies will have to bid even more to attract them.  Firms may have to pay up to poach workers, even if some of that compensation comes as locational flexibility.  Retention and attraction policies will have to move to the forefront if businesses are to meet the growing demand.  How that plays out is hard to predict, but it will be very interesting to watch, especially for investors.  For many companies, the ability to effectively manage their workforce in this uncertain labor environment could become the critical factor in profitability.