More normal labor market is clearly coming into focus

INDICATOR » November Challenger Layoffs and Weekly Jobless Claims KEY DATA » Layoffs (monthly): down 29.8 percent; Year-to-Date: down 5.8 percent/ Claims: 299,000 (down 14,000) IN A NUTSHELL » ‘It seems that every time we get labor market numbers, we get more indications that the market is tightening.” WHAT IT MEANS » The turtle is nearing the finish line. The goal is a normal labor market and we can see that coming into focus. Today’s numbers point to firms doing all they can to keep their current workers. Challenger, Gray and Christmas’ November job cuts report was very encouraging as there was a sharp decline from the October pace. That is important since there was a surprisingly large number of layoff announcements in October and it raised some questions about the direction of the market. Those questions look to have been answered. Layoffs are slowing sharply and are on target to hit the lowest level since 1997. That was near the peak of the dot.com bubble when hiring was robust.

Confirming the strength of the labor market was a large drop in new claims for unemployment insurance. This number had surged the previous week but we are back down below 300,000 per week and that is an indication that tomorrow’s payroll increase could be strong.

On a separate note, CoreLogic’s October foreclosure report indicates that the overhang of distressed homes is being whittled down rapidly as there is inventory has fallen by 31 percent since October 2013. But there are still a large number of houses in process. The pace of foreclosure is slowing but is still quite high. That said, the inventory of delinquent homes is the lowest since July 2008. MARKETS AND FED POLICY IMPLICATIONS » The slow but steady improvement in the labor market that has marked this recovery continues unabated and now we are facing the reality that the pendulum may finally be swinging away from employers and in favor of employees. We are not there yet, but we are getting there. That is crucial for the Fed since worker compensation seems to be the operative issue for rate hikes. Tomor- row we get the November employment report and I wouldn’t be surprised if the job gains, including any upward revisions, total at least 250,000. I include revisions because they have been pretty large lately and it is important to recognize the full extent of the payroll changes. As for the unemployment rate, it is a good bet to edge down to 5.7 percent. The labor market is closing in on full employment and should reach it by early spring. That means shortages should be appearing more broadly and at that point, wage increases are likely to follow. The timing is difficult given the change in attitudes of workers, who are still fearful of quitting or changing jobs, and business managers, who believe they should not have to give raises since they haven’t had to for so long.

That dynamic, though, creates the potential for a gap up in wage gains when more normal views of job mobility and worker compensation reappear. And if the restraining effect of the foreclosure inventory can dissipate, the housing market would strengthen and that would add further to growth and accelerate the labor market tightening and wage increases.