Plenty of jobs but few wage gains

INDICATOR: November Private Sector Jobs and Help Wanted Online and Revised Third Quarter Productivity

KEY DATA: ADP: +190,000; Manufacturing: 40,000/ HWOL: +137,100/ Productivity: +3.0 percent (unchanged); Real Compensation (Over-Year): -1.1 percent

IN A NUTSHELL: “The economy is in great shape as jobs are being created and job openings are soaring, but there is still no benefit flowing to labor as wage gains remain stunted.”

WHAT IT MEANS: One of the points I have been making about the tax cut bill is that it is coming at the wrong time. We don’t need more job growth, we need more workers and the sugar high created by the tax cuts will only exacerbate the growing labor shortages. Wednesday’s data reinforce that view. The ADP estimate of November private sector job gains was a quite solid. The increases were across the board as most industries and all sizes of businesses added workers solidly. If there was any questionable number in the report it was its estimate of a 40,000 increase in manufacturing payrolls. That is the largest number in the history of this report and it is likely overstating the actual increase. Even if it were off by 20,000, we would still have a very good increase in payrolls.

Supporting the view that the labor market is really strong and the only thing holding back even better job gains is the paucity of workers was the sharp rise in online want ads. The Conference Board reported that firms were looking for, or at least advertising for, a lot more workers in November than in October. Once again, this report indicated that the gains were spread across the nation and occupations.

With the upward revision to third quarter GDP, it was expected that the already solid productivity gain would also go up. It didn’t. But to me, the real news in the report were the changes in compensation gain. Hourly compensation was less than initially estimated and that led to a sharp downward revision to inflation-adjusted (real) hourly compensation. The gain over the quarter was modest and over the year, real wages fell sharply. That may have helped keep labor costs under control, but it did not do much for consumer spending power.

MARKETS AND FED POLICY IMPLICATIONS: The labor market is in great shape, at least if you are looking for a job. If you are looking for workers, not so much. And that is the point. Tax cuts should be used when the

economy needs tax cuts. It doesn’t need tax cuts right now. What it does need is tax reform, but there are few people outside the West Wing that are making a strong argument that either bill represents significant tax reform. Instead, it creates risks.

Mirroring the comments I have been making, Moody’s Analytics Chief Economist Mark Zandi, who calculates the ADP numbers, said Wednesday that: “The job market is red hot, with broad-based job gains across industries and company sizes … There is a mounting threat that the job market will overheat next year.”

When politics and economics are mixed in the stew, the policies that are created often have a very awful smell. This one stinks, at least if you worry about the economy over the next couple of years. If you are an investor or a large firm or a high-income household or have a company in certain “chosen” industries, it is full steam ahead – for a while.