KEY DATA: Openings: +346,000; Separations: -142,000; Quits: -38,000
IN A NUTSHELL: “Job openings are near record highs despite limited layoffs and quits.”
WHAT IT MEANS: Is the labor market tight? You bet. Job openings surged in March and are once again nearing the record high reached in January. All of those new vacancies were in the private sector as the public sector openings declined. The need for additional workers rose sharply in transportation and warehousing, health care, restaurants and real estate. With demand increasing, firms continue to hold onto their workers as tightly as possible. Layoffs dropped like a rock, as it makes little sense to cut workers if you cannot find replacements. I guess anyone, almost regardless of the issues, is better than no one. But to me the most impressive data in this report were the quit numbers. You would think that in this sellers market, workers would be moving around like crazy. That just doesn’t seem to be the case as the number of people quitting declined.
In a separate report, CoreLogic indicated that home prices rose moderately in March, but the increase over the year continued to decelerate. There are few metro areas where housing price increases are either accelerating or even high.
MARKETS AND FED POLICY IMPLICATIONS: You have to hand it to the business community: Despite being on the wrong side of the tight labor market, firms are managing to keep from a major bidding war for workers and are still not losing workers to competitors. Yes, compensation is rising decently, but it is no longer accelerating. At the same time, companies are squeezing out more output per worker. This rise in productivity has kept labor costs down and earnings up. All of this is happening in a world where information flows freely and quickly. Workers know about openings yet they appear to be either reluctant to apply for them or unwilling to accept those offers. For the Fed, that has to be worrisome. Inflation has moved back below target even as labor markets are tightening further. What happens if the economy softens or even worse, falls into recession and the wage gains disappear? One would think that the Fed should lower rates under these circumstances, but that would not make sense. First of all, the economy is not weak and it is not clear that lower rates would actually improve growth. Mortgage rates are extraordinarily low and it is housing supply that is the problem. Businesses investment hasn’t surged even after a tax cut that almost paid firms to invest. So cutting rates is not likely to accelerate growth significantly. But it would put the Fed in a bind if the economy faltered. There are already few arrows in the Fed’s interest rate quiver and lowering rates would empty it further. Also, the impact of lowering rates is not linear. Does anyone really believe that going from one percent to zero would do anything, especially if the need to hit bottom occurs when the economy is collapsing? Fed Chair Powell repeated that interest rate policy is the Fed’s main tool and lowering rates now would limit that tool greatly. What the Fed needs is more inflation, but it is largely powerless to accomplish that goal. To use a phrase that former President George H.W. Bush liked to use, the Fed is in “deep doo doo”.