All posts by joel

January Employment Report and Non-Manufacturing Activity

KEY DATA: Payrolls: +227,000; Unemployment Rate: 4.8% (up 0.1 percentage point); Wages: +0.1%/ ISM (NonMan.): -0.1point; Employment: +2 points

IN A NUTSHELL: “The labor market is still a solid job machine but workers are not seeing wages grow solidly.”

WHAT IT MEANS: The jobs machine keeps on humming along. The nation’s businesses added jobs at a very strong pace in January and the gains were spread across most of the economy. Construction workers were hired like crazy, manufacturers added to their payrolls, retailers kept expanding (or maybe they just haven’t shut the stores yet), finance and real estate companies grew, firms started hiring temps again and the health care and hospitality sectors continued to demand more workers like crazy. Only the government showed restraint. But there are some warnings in the numbers. The acceleration in job gains from December’s moderate 157,000 increase came largely from two places: Construction and temporary employment services. Weather probably played a major role in the construction swing (it was warm in January), while the decline in temp positions was likely an aberration, making for an outsized rise in January. Don’t be surprised if job gains retreat back to the 150,000 to 175,000 going forward.

The unemployment rate inched upward in January as the labor force surged, lifting the participation rate as well. All this angst about the falling participation rate is simply misplaced. The rate has been in a fairly tight range for over three years, as the demographic forces driving it down are being offset by the expected return of frustrated workers. Still, there doesn’t seem to be enough pressure on companies to bid more for workers. Wages rose minimally over the month and are up only 2.5% over the year – before inflation is factored in. That is just not good enough.

The Institute for Supply Management reported that the Non-Manufacturing sector continued to expand solidly in January. The overall index was off minimally and the details were solid. Most importantly, hiring is picking up, as order books are no longer thinning. Order growth is still strong, though a touch less than it had been, largely due to weakening in export demand.

 MARKETS AND FED POLICY IMPLICATIONS: Boy, what a difference eight years make. When Barack Obama became president in January 2009, the economy lost 793,000 jobs. The swing between then and now was over one million positions. The tasks facing the two of them are totally different. Eight years ago, it was stop the bleeding. Today, it is keep things going so wages can rise faster. Tax cuts, regulatory changes and infrastructure spending increases all could help, but they are not likely to significantly affect the economy until well into the second half of the year. That makes the Fed’s calculus more difficult. The unemployment rate is pretty much at its target and the inflation target is within sight. That seems to argue for a near-term rate hike. But Fed Chair Yellen has indicated she would be willing to let the economy run hot for a while and the modest wage gains provide her with some cover to do so. That said, monetary policy works with a lag and if the Trump fiscal policies are implemented, the Fed cannot fall too far behind the curve or it will have to raise rates faster than anyone would like. This increases uncertainty about the course of Fed policy. As for the equity markets, solid job gains and low wage pressures seem to be the recipe for a renewal of the exuberance we have seen since the election. How long that will last is anyone’s guess.

Fourth Quarter Productivity, Weekly Jobless Claims and Yesterday’s FOMC Statement

KEY DATA: Productivity (2016): +0.2%; Labor Costs (2016): +2.6%; Real Earnings (2016): +1.5%/ Claims: -14,000/ FOMC: “Steady as she goes.”

IN A NUTSHELL: “The Fed thinks the economy is okay and the data seems to support the view that the economy is okay, if you think okay is okay.”

WHAT IT MEANS: Tomorrow we get the January jobs report and if the huge increase in private sector jobs that ADP reported for the month is any indicator, it should be a good one. And it looks like firms will have to keep hiring if they want to expand output, as productivity is barely growing. In the second half of last year, firms did manage to squeeze out more output from their workforce, but for the year, the gain was miniscule. Only twice over the past thirty years has productivity growth been weaker. As a consequence, labor costs continued to accelerate, reaching its highest pace since 2007. Workers didn’t see their inflation-adjusted income increase very quickly, which is one reason so many voters were ticked off.

Businesses are going to have to make due with their workforces as the labor market continues to tighten. Jobless claims fell and are once again back to record lows. Challenger, Gray and Christmas reported that layoff notices, while up from December, were down nearly 40% from January 2016. Firms are holding onto their workers because they cannot find replacements. The Conference Board’s Help Wanted On Line measure rose in January. It had been declining for much of last year but starting in early fall, it stabilized and is now rising. And the Institute for Supply Management’s manufacturing employment index jumped in January. It is pointing to strong job gains, which supports the numbers that ADP reported. In other words, all the employment data released over the past few days point to a strengthening labor market.

MARKETS AND FED POLICY IMPLICATIONS: As expected, the Fed did not change the funds rate at the FOMC meeting that ended yesterday afternoon. The statement, though largely unremarkable, did make it clear that the members thought the economy was in decent shape. More importantly, instead of saying that inflation “was expected” to rise to 2% in the medium term, the members now believe that inflation “will” rise to that level. That may seem small but it shows that the Fed is now confident that their inflation target is in sight. If both the inflation and unemployment targets pretty much at hand, there is little reason for the Fed to continue standing pat for much longer. I have them raising rates in May, barring some unforeseen craziness that would upset the growth trend, such as a tariff.

So, where do we stand going into tomorrow’s employment report? The labor market is tight, the economy is solid but productivity is moribund. The productivity weakness is major threat to the hopes that the economy can grow at even a 3% pace let alone the hugely optimistic 4% rate that so many in the administration need to make their numbers work. With the labor force expected to expand at less than 1%, productivity would have to increase by 3% or more to get to that upper level. But this far into an expansion, that rarely happens. While you never can say never, basing economic and tax plans on a number that has a low likelihood of occurrence is not a particularly responsible thing to do. But I guess using the word responsible in reference to anything in Washington doesn’t make much sense either.

December Spending, Income and Pending Home Sales

KEY DATA: Consumption: +0.5%; Income: +0.3%; Prices: +0.3%/ Pending Sales: +1.5%

IN A NUTSHELL: “Consumers spending is holding up generally across the economy.”

WHAT IT MEANS: The final numbers for 2016 are trickling in and for the most part, they indicate the economy is in good shape but not accelerating at any great pace. Consumption rose strongly in December, which was expected. A jump in durable goods demand, mostly from vehicles, as well as a solid gain in services such as utilities helped power the sharp spending increase. Soft-good demand rose somewhat less. Still, this is a clear indication that people are willing to out there and spend. They should be able to keep that up. Income rose moderately, led by a rebound in wages and salaries. Unfortunately, much of those income gains are being eaten up by the rise in the inflation. Prices rose solidly as energy costs keep going up. Top line price increases over the year are up 1.6% and are closing in on the Fed’s target level slowly. The Fed members have some breathing room, but that is fading. Income adjusted for taxes and inflation rose at a slower pace in 2016 than in 2015. That is not a good trend. The recent decline in the savings rate is not a major concern as it is till at a decent level.

The National Association of Realtors reported that pending home sales rebounded in December after having crashed in November. Solid gains in the South and West outweighed more modest declines in the Northeast and Midwest. An interesting division that was highlighted in the report was the huge increase in pending home sales in the $250,000 and above group since December 2015 compared to a decline in the under $100,000 group. A dearth of homes on the market at the lower levels, as well as the recent rise in mortgage rates, is hurting the low-priced segment.

MARKETS AND FED POLICY IMPLICATIONS: Since the income and spending numbers for the final month of any quarter are released after the GDP data for the entire quarter, they usually are non-events. But they do provide some detail for the latest month and in this case, it is clear that consumers are still willing to part with their income, which is rising. The savings rate is being used to maintain spending and prices are pressuring households who are still not receiving significant increases in their wages. That raises some flags about spending going forward. Yes, confidence has been rising, but you still need the money to spend and while the labor market is tight, firms are still willing to go without rather than pay up for new workers. The FOMC starts its two-day meeting tomorrow and the expectation is that no rate hike will be announced. However, I am looking for a warning or suggestion that if fiscal policy starts to become expansionary rather than contractionary, the Fed will have greater ability to normalize rates. That is, rates will rise faster than expected.

4th Quarter GDP, December Durable Goods Orders and January Consumer Sentiment

KEY DATA: GDP: 1.9%; Exports: -4.3%; Inflation: 2.1%/ Orders: -0.4%; Excluding Aircraft: +1%; Private Capital Spending: +0.8%/ Consumer Sentiment: +0.3 point

IN A NUTSHELL: “It was a tough year for the economy, but growth in the fourth quarter was not as soft as the headline indicates.”

WHAT IT MEANS: If ever there were a day when the headline numbers misrepresented what was going on in the economy, today was that day. Take overall economic growth, which posted a modest gain in the final quarter of the year. For all of 2016, GDP expanded at a disappointing 1.6% pace. The increase was 2.4% in 2014 and 2.6% in 2015. So why am I saying things are not that bad? As always, let’s go to the details. Consumers spent at a solid, though slightly slower pace in the fourth quarter. But I will take 2.5% every quarter. Business spending on equipment and intellectual property was up faster than in the third quarter. Companies are now rebuilding their inventories. Firms did cut back on investing in structures, but that is a notoriously volatile component. Also, the government, at least state and local governments, is now starting to spend more normally, even if spending on defense remains weak. The real problem with this report is that the economy suffered a “tofu attack”. Poor soybean crops in South America led to a huge surge in U.S. exports in the summer, but that rise was temporary. The fall in exports coupled with a jump in imports meant that instead of adding 0.85 percentage point, as it did in the third quarter, trade subtracted 1.7 percentage points of growth at the end of the year, a 2.55 percentage point swing. In addition, the key measure of private sector domestic activity, final sales to private domestic purchasers, grew faster. On the inflation front, consumer costs rose at the Fed’s target rate in the fourth quarter and over the year, the rise is now close to the Fed’s 2% goal.

Adding to the belief that the economy is in good shape was the December durable goods report. Yes, it declined, but let’s go to the details. The biggest drop was in defense aircraft. Not even a solid rise in civilian aircraft sales could overcome that decline. Excluding aircraft, order rose strongly. In addition, the best measure of private sector capital spending rose solidly for the third consecutive month. Even the energy sector is investing again. This report was strong and indicates the economy may have some momentum building.

Finally, The University of Michigan’s Consumer Sentiment index rose modestly in January after jumping in December. That the gain in confidence was sustained is good news for future consumer spending.

MARKETS AND FED POLICY IMPLICATIONS: The economy didn’t do particularly well last year, but we did end the year on a positive note. Consumers are spending, businesses are investing and the government is no longer blocking the way. With the energy sector, which had restrained growth significantly in the first half of the year turning around, even without any significant fiscal stimulus, growth should move back above 2% this year. That should be enough to cause the unemployment rate to drop below full employment by the end of the year and continue the upward trend in both wage and price inflation. That implies the Fed will likely have to raise rates multiple times this year and I expect an increase of 100 basis points. How those longer-term trends play with equity investors is unclear, but if they read today’s data as weak, that would be a misinterpretation of the numbers.

December New Home Sales, Leading Indicators and Weekly Jobless Claims

KEY DATA: Sales: -10.4%; Prices (Over-Year): 7.9%/ Leading Indicators: +0.5%/ Claims: +22,000

IN A NUTSHELL: “It is too early to say that rising rates are causing the housing market to tank, despite the sharp drop in new home sales.”

WHAT IT MEANS: “If you build it they will come.” Well, maybe, maybe not. Home sales dropped sharply in December as the weakness was spread across most of the nation. There was a huge 41% decline in the Midwest, which may have been weather related. But demand faltered significantly in the South as well. Demand was also off, though modestly in the West. The only region posting a gain was the Northeast, which bounces around like a Super Ball. Sales may have been down and the number of new homes for sale may have risen, but that didn’t stop prices from soaring. There still is a dearth of inventory as most of the increase in houses on the market came from listings of homes that were not yet started. Developers are not so sure if they build it the buyers will indeed come. They are getting higher prices for their product but are unwilling to do much speculative construction.

Look down the road, not only should growth remain decent but we might see an upturn. The Conference Board’s Leading Economic Index jumped in December and it has been accelerating for a while. Even without any business-friendly policies from the new administration, it looks like the economy will expand faster this year.

There was a sharp jump in the number of unemployment claims last week but not to worry.   As I noted last week, the data had reached rock bottom and were not likely to be sustained at those historically low levels. We are pretty much back to what I think will be more typical claims numbers and they still point to a further tightening in the labor market.

MARKETS AND FED POLICY IMPLICATIONS: The new president is churning out executive orders like crazy. Still, those don’t create a lot of change by themselves. The details of the enabling legislation matter the most. Are we really going to spend $15 billion or more for a wall when there are so many other pressing needs? Starting the process of repealing Obamacare may make for a good sound bite, but does anyone know what the replacement will be? Anyone seen the tax cut or infrastructure spending plans yet? All these things may be coming, but until they are here, we continue to operate on hopes and prayers. As an economist, I can only say I have no idea to what extent growth may be affected. Yet investors keep pushing prices up. That only puts even greater pressure on the Republicans to deliver. The need to feed the stock market beast is not a good way to run an economy and you can bet when the Fed meets next week, that will be the major topic of conversation.    

December Existing Home Sales and January Philadelphia Fed NonManufacturing Survey

KEY DATA: Sales: -2.8%; Prices (Over-Year): 4%/ Phil. Fed (NonManufacturing): +18.2 points; Expectations: +7.3 points

IN A NUTSHELL: “The dip in housing sales is more a sign of the lack of homes to be bought than the desire to buy homes.”

WHAT IT MEANS: While the housing sector has come a long way in the past six years, it is still can have its ups and downs. The National Association of Realtors reported that existing home sales moderated in December, though the decline was nothing significant. Given that the November rate was the highest in nearly a decade, a small drop isn’t worrisome. Condo sales fell sharply while single-family purchases were off more modestly. Three of the four regions posted declines with the South flat, so weather cannot be the excuse. As for prices, they were up decently. But the real story in the report was the continued decline in inventory. The number of homes on the market hit its lowest level since the NAR started collecting the data, which was 1999. It is hard to sell homes that are not for sale.

The Philadelphia Federal Reserve Bank’s January survey of nonmanufacturing firms was quite a surprise. While the activity index is pretty volatile, the surge in the current economic conditions index was huge. Orders jumped, revenues soared and hiring picked up – but only for full time workers. Interestingly, the demand for part-timers grew less rapidly. While the greater Philadelphia region may not be the fastest growing area in the nation, unemployment rates have been coming down. Firms may be switching part-timers to full-time when they cannot find qualified workers to fill open positions. Looking forward, the expectations index hit is highest level in the nearly six years this survey has been in existence. That bodes well for future hiring and investment.

MARKETS AND FED POLICY IMPLICATIONS: The Trump administration hit the ground running, but what all those executive orders mean for the economy is unclear. Easing pressures created by Obamacare may sound good, but what exactly that entails and what the impacts will be on patients, the insured, insurers and providers is anyone’s guess right now. The pipelines may get built, but when is also uncertain as court cases will undoubtedly be filed. And as an aside, you build energy pipelines for energy reasons, not for jobs. The jobs disappear quickly but the pipelines are here to stay, so let’s evaluate the projects accordingly. But what really matters are whatever tax changes are passed, the structure of any Obamacare replacement, what regulations are rescinded and whether trade flows are affected by tariffs (excuse me, border tax) or export subsidies (excuse me, border adjustment tax). I’ll get the hang of the new PC economic jargon eventually. That is important because as we all know, there is no such thing as a free anything. Some businesses and individuals will gain from the changes while others will lose. Until we know more, the best we can say is that we don’t really know. And I am just not sure when we will know. Meanwhile, the Fed and investors have to operate in this environment of uncertainty. If you believe the business and consumer confidence surveys, there are great expectations about the future. Now it is up to Congress to deliver.

December Industrial Production, Consumer Prices and Real Earnings and January Home Builders Index

KEY DATA: IP: +0.8%; Manufacturing: +0.2%/ CPI: +0.3%; Less Energy: +0.2%/ Real Earnings: +0.1%/ NAHB: down 2 points

IN A NUTSHELL: “Inflation is at the Fed’s target and with manufacturing and home construction solid, there is every expectation that multiple rate hikes will occur this year.”

WHAT IT MEANS: Today’s data dump provides a clear picture of an economy moving forward and inflation that is steadily accelerating. Industrial production surged in December, but most of that was due to a bitter December that followed unseasonably warm October and November weather. But more importantly, manufacturing activity rose decently. This had been the economy’s weakest link but output was up for the third time in four months. The fourth quarter rise in manufacturing production points to a GDP growth rate that may not be greatly different from the solid third quarter number. The petroleum sector is starting to recover, which is good news for many firms that supply goods and services into that portion of the economy.

As for inflation, it continues to edge up. The Consumer Price Index rose solidly in December. Even excluding energy, which jumped once again, costs are starting to accelerate. While eating in is costing less (I’m paying less for my baked goods), eating out is more expensive – and we do eat out a lot. Health care, used cars, rent and transportation services costs are all rising more sharply. At least we are paying less for apparel. But the jump in consumer prices largely offset a strong increase in wages, so household spending power increased modestly. Workers keep spinning their wheels and as the election showed, they don’t like that and they vote.

Despite a decline in the National Association of Home Builders/Wells Fargo Housing Market Index in January, the level of confidence is the second highest in over eleven years. One year ago, the Index was at 61 compared to the 67 this January. The NAHB indicated that builders expect single-family home construction to rise 10% this year. I’ll take that.

MARKETS AND FED POLICY IMPLICATIONS: Unless the Republicans self-destruct and don’t pass any tax cuts and spending increases, expansionary fiscal policy should hype economic growth this year. The extent and timing of those changes and their impacts on the economy are unclear, as reality is beginning to set in. That is true both for the politicians and the monetary authorities. Inflation is pretty much at the Fed’s target and it is likely to accelerate. Indeed, a report today by ADP indicated that wage gains continued to accelerate during the fourth quarter of 2016. With the unemployment pretty much at full employment, the Fed’s dual mandate is being met. Now, they have to decide what to do about the looming fiscal stimulus. The next FOMC meeting is in two weeks and the March meeting is in the middle of the month. It is doubtful we will have clarity on tax changes and spending by either meeting. But there is an early May meeting and I am betting that the next move comes then. First, even Congress can get its act together in three months, especially since there is one party rule. The second reason is that the Fed has been looking to prove that all meetings, not just those with a press conference, are live. The timing of the May 2-3 meeting is perfect to make that point. As for investors, euphoria is great but reality ultimately rules. It is time to decide what is likely and what is a dream. The fiscal stimulus program remains unclear and I suspect investors are finally beginning to factor that into their decision-making.

November Job Openings and December Small Business Confidence

KEY DATA: Openings: +71,000; Hires: +59,000; Quits: +41,000/ NFIB: +7.4 points

IN A NUTSHELL: “Even with workers in short supply, small business owners are euphoric about the future.”

WHAT IT MEANS: Wages increased sharply in the last employment report and there is every reason to think those gains can be sustained. Job openings rose in November and while they are not near their record highs, they have stabilized at a very strong level. Most of those, however, were for government positions. Hiring, which had started a downward trend, in the middle of the year, has also stabilized. But the really important number in the Bureau of Labor Statistics’ JOLTS report was the quit data. It appears that workers are showing a growing willingness to leave their jobs and that is a clear sign that the labor market is really tight.

Small business owners are also indicating they are having trouble finding qualified workers. In December, the National Federation of Independent Business reported that 44% of their respondents said there were “few or no qualified applicants for the positions they were trying to fill”. As a consequence, job growth was minimal. Yet this business segment looks like it has welcomed the Trump victory with open arms. The percentage of business owners saying they expect the economy to improve rose by a “stratospheric” (NFIB term) 38 percentage points. Those expecting greater sales jumped by 20 points. We are not talking happy here, we are looking at euphoria. Interestingly, these companies will have to actually hire a lot more workers if they expectations are to be met.

MARKETS AND FED POLICY IMPLICATIONS: The buoyant views of the small business sector hold out great hopes that the economy can pick up steam this year. Owners seem willing to hire and expand, but they need to be able find the workers to hire and those are in short supply. Tax cuts will help the bottom line, but they unless the improved after-tax earnings translate into a willingness to pay more, small businesses will not be able to create as many new positions as we might expect. Let me repeat this mantra again: If you cannot attract qualified workers at the going wage (and it is clear that small businesses have been unable to do that), the choice is to do without or raise wages. If growth accelerates, owners will face the choice of not meeting demand because of a lack of workers or paying up to attract qualified workers from other firms. But the impacts of fiscal policy are well into the future, so don’t look for any major increase in wages for a while. With the inauguration ten days away, the markets will not be watching these secondary data very closely, so I don’t expect much of a reaction. But it is good to know that small business owners are hopeful. The pressure is on the political leadership to deliver tax and regulatory changes that help these firms, not the usual tax changes that do a lot for bigger companies but leave small businesses behind. Here’s a suggestion: Stop the double-taxation of small business owners. Don’t make them pay twice for Social Security and Medicare – once for their own income and a second time for the company, which is their own income anyway.

December Employment Report and November Trade Deficit

KEY DATA: Payrolls: +156,000; Private Sector: 144,000; Revisions: +19,000; Unemployment Rate: 4.7% (up from 4.6%): Wages: +0.4%/ Trade Deficit: $45.2 billion ($2.9 billion wider)

IN A NUTSHELL: “The tight labor market may be slowing job gains but it is also forcing firms to pay higher wages.”

WHAT IT MEANS: The economy ended 2016 pretty much as expected: Job gains that made few happy but were about as good as can be expected. Yes, the number of new positions added in December was not nearly as much as expected, but then again, the previous two months were revised upward by enough to put the total gains at consensus. The percentage of industries showing increases rose, meaning that despite fewer jobs being added, the hiring was more broadly based. The health care sector continues to expand like crazy (the ACA needs to be repealed quickly so that doesn’t continue) and while we may not have been shopping at Sears or Macy’s, we still went out to eat. Restaurant employment surged once again. Despite all the woeful stories coming from statehouses, state and local governments are hiring and it is not just educators. What I really liked was the sharp rise in manufacturing payrolls. The Institute for Supply Management has been saying that firms are hiring again and the government has finally found that trend. The weak links were general merchandisers, temporary help service firms, accounting companies and, strangely, the motion picture industry.

On the unemployment front, the rate rose a tick, but that was expected given the outsized decline in November. The labor force expanded and the participation rate was stable. The real (or really dumb) unemployment rate, which adds in part-timers for economic reasons and discouraged workers, declined to its lowest level since April 2008. Given businesses desires to hire more part-timers, this rate is nearing its likely bottom.

But the best news in the report had to do with wages, which rose sharply. The 2.9% increase over the year was the fastest since May 2009. We still have a way to go before way gains are strong, but we are getting there.

As for trade, the deficit widened sharply in November. Imports were up, led by increases in crude (higher prices helped) and food. Meanwhile, exports declined for the second consecutive month. The stronger dollar is not helping. Even adjusting for prices, the deficit widened, meaning the foreign sector might have restrained growth during the fourth quarter.

MARKETS AND FED POLICY IMPLICATIONS: With the inauguration just two weeks away, the economic data may be taking a back seat to politics. But discounting the numbers is risky since the new administration’s economic policies will work or not work based on where we are. Cutting taxes early in the Obama administration was truly dumb as firms were more worried about survival than hiring or investing. But when the economy is moving forward, tax cuts could work, depending upon their structure. In contrast, when unemployment is high, once the economy gets going, it is easier to hire workers than when there are few people looking for work – as is the case now. The labor force grew at the fastest rate in a decade, an indication that people are piling back into the workforce. Still, the unemployment rate declined. Going to 3.5 or 5 million new jobs per year, as some politicians have said is possible, would require a the labor force surge the likes of which we haven’t seen since the boomers were coming of age. Instead, expansionary fiscal policy will likely add somewhat to growth, but even more to wages. How businesses handle those added costs will determine the inflation rate and how fast the Fed actually raises rates. In other words, 2017 should be really exciting in oh, so many ways.

December Private Sector Jobs, Layoffs and Weekly Jobless Claims

KEY DATA: ADP: +153,000; Small (1-19): -3,000; Manufacturing: -9,000/ Layoffs: 33,627/ Claims: -28,000

IN A NUTSHELL: “The tight labor market is making it hard to find workers, so firms are holding onto they current employees tightly.”

WHAT IT MEANS: Tomorrow is employment Friday and it looks like job gains will be close to the consensus of about 180,000. The payroll services firm, ADP, estimated that private sector hiring slowed a touch in December, but there are some oddities that may lead to a higher government figure. First off, the small firm category, which runs from 1-49 workers, barely added anyone and the smallest, 1-19 workers, actually reduced payrolls. That is not normal. Also, this segment is largely estimated by BLS in their first calculation, so the government’s number may come in higher. Meanwhile, medium and large sized firms added workers solidly. Another issue is ADP’s indication that there was a further decline in manufacturing payrolls. For three months in a row, the Institute for Supply Management has been reporting that its respondents are hiring, not firing. Don’t be surprised if we get a small rise in manufacturing payrolls.

Another factor to be remembered when considering the jobs report is that it nets out hiring and firings (and openings and closings), and layoffs are just not happening. Challenger, Gray and Christmas reported that layoffs in December were up from the November number. Still, the total third quarter job cuts announcements were the lowest since second quarter 2000. And for the full year, layoff announcements were 12% below the 2015 total.

Reinforcing the belief that firms are just not firing people was the sharp decline in weekly jobless claims. These data keep bouncing around, as they always do, but the four-week moving average is at a record low level when adjusted for the labor force. That pretty much says it all.

MARKETS AND FED POLICY IMPLICATIONS: Tomorrow’s employment report should be decent but not great. It is likely the unemployment rate will move up a tick or two, but that is because the sharp decline in November was an aberration. Regardless, whether we end the year at 4.5% or 4.8% is largely irrelevant. The labor market is tight. Indeed, maybe the biggest complaint that firms have is their ability to find qualified workers. If that is the case, then hiring will be limited and may actually slow going forward. The option is for wages to rise, which I have been expecting for a couple of years. That would trigger worker musical chairs. The most skilled would move to the higher paid positions and other workers would take up their jobs. As everyone moves up the scale, the lowest skilled positions would become empty and that is where the supply of workers is likely the greatest. Given the large number of openings that exist at all levels, it is hard to accept the argument made by some that there is this huge pool of people who could get decent if not well-paying jobs, that are simply sitting around watching Wheel of Fortune. And let’s also not forget that a market has two sides: supply as well as demand. The lower the wage, the lower the supply. Currently, the wage rate at many levels, not just the minimum wage, is acting as an artificial ceiling. Employers don’t think they should have to offer more than either the minimum wage or what they have been paying for years. But at the current level, the supply of workers is simply too low to meet the demand. The answer, as some suggest, is not to lower the wage – especially the minimum wage – to raise demand. If you actually believe that markets work, that would only reduce the supply further, exacerbating the problem. The answer is to raise wages, increasing supply and reducing demand so the market moves back toward equilibrium. In the past, the private sector did just that. Until firms start increasing compensation faster in this cycle, they will continue to face a shortage of workers.