KEY DATA: ADP: +158,000/ Layoffs: 31,105/ ISM (Non-Manufacturing): +0.5 point/ Deficit: $1.1 billion narrower/ Claims: +4,000

IN A NUTSHELL: “The tight labor market is the limiting factor when it comes to job gains despite an improving economy.”

WHAT IT MEANS: Tomorrow is Employment Friday, but it could be one of those shoulder shrug reports. ADP’s estimate of June private sector job gains came in at what I call trend job growth. Given the shortage of available, qualified labor, it is hard to see how firms can hire lots of people. And more than likely they didn’t. But if the ADP forecast is anywhere near what we get, then you can categorize the number as decent. The one concern in the data was that small business hiring was weak. If the hiring slowdown was due to sluggish demand rather than a lack of qualified workers, it could be a warning that growth is moderating.

Yesterday I wrote that I expected the June payroll increase to be somewhere in the 160,000-range, which is enough to keep the unemployment rate slowly declining. It is also enough to keep the pressure on firms to find ways to retain their current workers. Challenger, Gray and Christmas reported that layoffs were pretty modest in June. They were down from May’s total and the May 2016 number. Of course, last year the energy companies were shrinking like crazy, so the year-over-year numbers must be looked at carefully. For the first half of the year, compared to 2016, layoff announcements fell nearly 28%. Excluding the energy sector, they were down about 8%. While unemployment claims rose a little last week, they are still quite low, which reinforces the view that firms are holding onto their workers very tightly.

The trade deficit narrowed in May as imports declined a touch while exports grew. Our imports of vehicles and consumer goods were off sharply, but that was largely offset by increases capital goods and industrial supplies purchases. On the export side, sales of vehicles and consumer goods were strong enough to overcome lowered demand for U.S. food, industrial supplies and capital goods. Oil played a limited role in the change in the deficit. It looks like the trade deficit, which narrowed and added to growth in the first quarter, may have subtracted a little from growth in the second quarter.

Yesterday, I incorrectly reported on the Institute for Supply Management’s Non-Manufacturing June report. Today’s release shows that this sector expanded faster in June on the strength of surging new orders. However, payrolls increased less quickly. With both the ISM manufacturing and non-manufacturing activity and orders indices rising, it looks like the economy picked up some steam in June.    

MARKETS AND FED POLICY IMPLICATIONS: Politics aside, if that is possible, the labor market is strong and is constrained not by a lack of demand for new workers but the ability to find workers, at the going wage, who have the qualifications firms need. Realistically, any job increase that is 150,000, plus or minus 25,000, should be considered as “good as can be expected”. But when labor demand exceeds supply, firms face a dilemma: Do they raise wages to attract workers from other firms and retain their own employees, do they try to meet the growing demand for their goods or services through productivity increases, or do they simply turn down orders or push out deliveries? Right now, companies are not raising wages much but are also not doing much of a job increasing productivity. That combination may be a reason economic growth is so slow. In any event, watch two numbers tomorrow, wages and hours worked. They should provide insight into the extent that the tight labor market is forcing firms to pay up for workers and/or extend out workdays, including moving people from part-time to full-time status.