KEY DATA: Layoffs: 65,141/ Claims: up 17,000/ ADP Jobs: 156,000; Productivity: -1%; Labor Costs +4.1%/ Help Wanted: +39,000

IN A NUTSHELL: “The labor market is tight, but the tightening process may be slowing.”

WHAT IT MEANS: If Janet Yellen is laser-focused on the labor market, the data released over the past two days don’t indicate that conditions are firming sharply. Of course, tomorrow we get the jobs report, so everything could change. But until then, let’s review the recent data, starting with today’s the jobless claims report. While there was a pop in the number of people filing for unemployment insurance last week, that is not unusual. These data bounce around a lot. The four-week average is still at a level that says firms are doing everything they can to keep workers. That said, Challenger, Gray and Christmas reported an April surge in layoffs, led by the ever-shrinking energy sector. The total for the first four months was the highest since the 2009. Before you panic, the 2009 total was nearly three times this year’s number. Also, we have no idea where or when or even if they will occur. Still, firms seem to be announcing cut backs at a surprisingly high pace given the unemployment claims numbers and yesterday’s report by the Conference Board that online want ads rebounded.

Yesterday, there were a number of labor market reports. ADP’s monthly reading of April job gains came in below expectations as mid-sized businesses added workers at a lower than typical pace. However, the level was the same as the July 2015 number and job growth was very solid during the second half of last year. We may get a lower than expected number tomorrow.

But for me, the biggest eye-opener was the productivity and costs report. I have argued that the monthly hourly wage number is worthless, even if the markets want to make believe it contains useful information. I prefer to look at the more complete compensation data that is contained in the productivity and Employment Cost Index reports. Productivity continues to falter as firms are hiring but output is largely going nowhere. With compensation gains holding fairly steady, labor costs surged.

MARKETS AND FED POLICY IMPLICATIONS: The labor market is tight but it doesn’t seem to be in the grips of a major shortage situation just yet. Firms are doing everything they can to keep their workers. Challenger, Gray and Christmas indicated companies are resorting to stay, not exit interviews. Instead, they might try raising pay, but of course that still is a non-starter for most firms. And that is the point. No matter how tight the market may be, companies are still willing to go without new hires and limit pay increases. For me, that is the biggest reason productivity is so weak. Let me say this again, wage increases drive productivity not just productivity drives wage increases. This is a simultaneous process that firms seem to think is a one-way relationship – productivity first, wage gains, maybe, second. Until workers have reasons to work harder (i.e., greater compensation), they will find ways not to work harder. That is human nature and failing to understand that will keep productivity and earnings down. But the Fed will worry about compensation growing slowly and say the labor market is not tight. And the Fed will see productivity is weak and say the economy is at risk. What the members will miss is the interaction of the two and by doing so, miss what are some of the real problems in the economy.