KEY DATA: ISM (NonManufacturing): +0.5 point; Activity: +2.6 points/ ADP Jobs: 177,000/ Layoffs: +37,202/ Claims: +3,000

IN A NUTSHELL: “With the economy booming, it is becoming harder and harder to find workers to hire.”

WHAT IT MEANS: Boy, are businesses in good shape. Earlier this week we saw that manufacturing activity rose again in June and today the Institute for Supply Management indicated that the nonmanufacturing portion of the economy might be in even better shape. Business activity surged and it was already strong. New orders were robust. But hiring eased a touch, though it is still quite strong. Despite soaring production, orders books are still filling at a pretty rapid pace. It is getting harder to meet the strong demand and that has led to deliveries slowing further. Will firms start allocating demand by raising prices? That might be coming.

Tomorrow is Employment Friday and it looks like job gains will be solid. ADP’s measure of private sector employment increases pointed to a very good but not great increase. There was limited hiring in the small business segment, which usually leads the way. If there is going to be problems hiring, it is likely to show up here as larger businesses can pay more and provide better benefits. That may be the case already.

Job layoffs remain low, even if they did pick up in June. Challenger, Gray and Christmas reported a jump in layoff notices and we are starting to see a rise from last year. The report noted that “in the wake of announced tariffs, we may be entering a period of increased cuts going forward”. Interestingly, retail is stabilizing and it was also pointed out the firms are already looking into creating a suitable workforce for the holiday shopping season. On the other hand, other sources indicate that firms have been scrambling to find any worker possible to fill positions and many are just not working out. That could be leading to more turnover.

Jobless claims increased last week and are running a touch higher than they had been. Still, the level remains pretty low.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s payroll number could be a head scratcher. Clearly, firms are looking for workers and have become somewhat desperate. But if they cannot find them, then job growth could be lower than the consensus of roughly 200,000. I would not be surprised if it is closer to 150,000, even if the labor force participation rate rises. A disappointing number would not be a sign of weakness, other than in labor supply. As I have argued all year, the key number is the hourly wage change. If we get the expected pop in wages, it will be taken as a warning that the labor market tightness is finally creating higher wages. This is a terrible measure, but it is closely watched nonetheless. I don’t like it because it is a weighted average, so it is possible that the average wage rate can fall even if all wages rise. In addition, it doesn’t include benefits and firms are upping their use of non-wage compensation packages in order to attract workers while not locking in higher salaries. Investors, though, seem to be willing to shrug off just about any and every hurdle placed in their way so a weak employment number may – or may not – affect the markets. Rationality is not the same thing as efficiency.