KEY DATA: ADP: +235,000/ HWOL: -185,7000/ Deficit: $2.7 billion wider

A NUTSHELL: “The labor market is strong, maybe too strong.”

WHAT IT MEANS: One of the risks of the tax cuts and added government spending is that a stronger economy could put great pressure on wages. Well, it looks like that may already be happening. Friday we get the February employment report. Today, ADP released its estimate of private sector job gains for February and it looks like businesses hired like crazy. The gains were across the board, with robust payroll increases in every size of business and in just about every sector. The only decline was in information services, which has been soft for quite some time now. Meanwhile, construction was up big-time. The mild February may have played a major role in the strong hiring.

The strong payroll gains may be cutting into the backlog of open positions as the Conference Board’s Help Wanted OnLine measure was down sharply in February. Maybe. It is hardly clear why the number of want ads dropped, but they did, and the declines were widespread. Seven of the ten major occupational groupings followed showed fewer ad postings while declines were seen in every region, most states and three-quarters of the major metropolitan areas. There is still strong need for computer and math specialists, which is not a surprise given there are few people with those skills who are actually unemployed.

With tariffs and trade wars in the news, the focus is likely to shift to the trade data and today’s deficit is not likely to make the White House happy. The trade deficit widened sharply in January as exports fell while imports were largely flat. Oil was the prime driver of the deficit as rising prices led to a significant increase in the value of oil imports. Excluding oil, imports would have been down, as the major components, such as consumer goods and food, were lower. Interestingly, our purchases of foreign aluminum and most steel products declined. On the export side, we sold more vehicles and consumer goods, but less of most other goods. As for the country issue, the deficit with China surged, narrowed with the EU and Mexico but widened with Canada. That is just a one-month snapshot, but it’s today’s number, which is likely to matter to some.  

MARKETS AND FED POLICY IMPLICATIONS: The ADP estimate of private sector payroll changes is a good guide, but it can differ quite widely from the month’s government numbers. The trends are similar, though, and ADP is indicating that job gains are still quite strong. That is happening despite the fact that companies have been complaining for years that they cannot find “qualified” workers. Either tons of “qualified” workers are suddenly deciding to get off their couches, stop eating cereal and enter the workforce or the definition of “qualified” just may be changing. I opt for the second explanation. Businesses had failed to adjust to the fact that there just wasn’t the massive oversupply of labor they benefitted from in the first years after the end of the Great Recession. Reality may have finally settled in. But there are implications of hiring less qualified workers; the biggest is that productivity is likely to remain weak. The revised 2017 productivity numbers were released today and an increase of 1.2% is hardly something to celebrate. And since growth can only come from either productivity or added labor, the modest productivity increase implies that strengthening growth could put pressure not just on wages but prices as well. As for the markets, trade wars are bad and anyone who thinks otherwise has been smoking too much medical marijuana. There is reason to be concerned and until we actually see what tariff plan is implemented – and the reaction – uncertainty and wild equity price swings are likely to continue. In addition, a trade war would likely cause the Fed to rethink its interest rate normalization strategy. I still expect a rate hike at the March 20-21 FOMC meeting, but going forward, the pathway of rates will depend upon the actual, not tweeted, trade proposals.