KEY DATA: ADP: 156,000; Small: 11,000; Large: 78,000/ ECI (Over-Year): +2.7%; Wages: +2.9%; Benefits: +2.3%

IN A NUTSHELL:  “Despite decent job gains, worker compensation gains continue to fade, which is a real conundrum.”

WHAT IT MEANS:  Our illustrious Fed Chair is concerned about the economy and since growth has depended on strong consumer spending, the focus has to be on job gains and worker compensation.  In both cases, conditions remain solid, though not nearly as strong as one would expect.  Take payrolls.  According to the employment services firm ADP, private sector hiring was solid in July, though nothing spectacular.  The issue is with small businesses, which are hardly hiring.  These firms are being battered by tight labor markets, which make it difficult to find workers.  Small companies tend to have limited or no be benefits and need part-time employees and if workers can find full-time jobs with benefits, they will take it.  That is usually with larger firms, who are hiring at a strong pace.  Small businesses are also facing the reality that demand is shifting to online purchases, a place where they have significant problems competing.  So it is not a surprise they are losing out.  But the implication is that most hiring will occur at medium to large-size companies, a change from the past.  The hospitality, health care and administrative services sectors continue to add workers solidly, though manufacturing and mining have weakened.

With the supply of workers is constrained by the low unemployment rate, we should be seeing income gains accelerating.  That is just not happening.  Compensation is decelerating.  The Employment Cost Index rose at a solid but slower pace in the second quarter, marking the second consecutive quarter that worker compensation moderated.  Both wage gains and especially benefits increases have faded.  That is a real surprise, especially the sharp drop in benefits growth.  Anecdotal stories have it that firms are using lots of non-monetary inducements to keep or attract workers.  It could be that those benefits are not being captured by the government’s survey. Indeed, government benefits remain high and the public sector is limited in its ability to be imaginative in retaining and attracting workers.  So, we may be getting an incomplete picture of the compensation situation.MARKETS AND FED POLICY IMPLICATIONS: The Fed’s rate decision will be coming out soon so the markets will be focusing more on what is in the statement and what Chair Powell says at his press conference than on any economic number.  But the data don’t point to a faltering economy, only a moderating one.  With the economy expanding at trend growth in the second quarter and with inflation at a pace in excess of the Fed’s 2% target, there is no reason to cut rates. But Mr. Powell put the Fed into a straight jacket and he has to loosen it at least a little today.  Where we go from here, though, is the real question and given the rapidity with which Whiplash Jay changes direction, I have little idea what the next move will be.