December Job Openings and January Small Business Optimism

KEY DATA: Openings: +261,000; Quits: +196,000/ Small Business Optimism: -1.3 points

IN A NUTSHELL: “If the labor market is tightening, can the economy really be faltering?”

WHAT IT MEANS: The stock market continues to gyrate wildly, but we can still take hope from the simple fact that we haven’t seen the real economy mirror the financial economy. The latest reports provide further indications that the labor market is still in good shape. The December Job Openings and Labor Turnover survey (JOLTS) shows just how Wall Street and Main Street are diverging. Unfilled positions surged in December to the second highest level on record. While hiring and separations were relatively balanced, the eye-opener was a jump in the number of people quitting their jobs. We are back to levels not seen since 2006, well before the recession began. That positions are hard to fill was reinforced by two other surveys. Yesterday, the Conference Board’s Employment Trends Index posted a nice gain, pointing further job growth going forward. Also, while the National Federation of Independent Business’s January survey showed that small business optimism is declining, the index measuring difficulty in filling positions rose to its highest level since the end of the recession. The NFIB members are concerned that business conditions and sales will not hold up going forward.  

MARKETS AND FED POLICY IMPLICATIONS: I have argued many times before, the key to the labor market is the willingness of people to leave positions, something they simply have not been doing since the onset of the Great Recession. That appears to have changed. Firms are going to have to start recognizing that they need to spend some money retaining their workers, especially since there are not that many people out there who need a new job. There are many who want a new position, and they can be lured away, but that means raising salaries. As firms raise salaries either to retain their workers or attract their workers, the pressure on margins and prices will only rise. Inflation is hardly an issue right now and with oil prices continuing to fall, the headline number will remain well below the Fed’s target for a while. But the members watch the JOLTS report closely as an indicator of future wage inflation, and given the quit rate level, it is flashing red. Nearly 2.9 million new positions were created last year and the unemployment rate dropped below 5% in January. Say what you want about discouraged workers, but when people are once again quitting, after having gone through the labor markets of the last seven years, that tells me those numbers accurately reflect what is going on. Fed Chair Yellen testifies in front of Congress on Wednesday and Thursday, so we will get some insights into her thinking about the economy. The latest labor market reports provide her with the ammunition needed to make a balanced presentation and keep her options open. Of course, investors are still following oil, so it is doubtful reports about the actual economy will make much of a difference.