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 their 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.