Tuesday has been a great day for the labour market.
Small business optimism is at a new post-crisis high. The NFIB small business optimism survey rose to 100.4 in December, the highest reading since October 2006.
Additionally, job openings rose to a new post-crisis high, and following these reports, economists can barely contain their excitement about the economy.
“The labour market isn’t just healing, it is red hot with nearly 5 million jobs available,” Bank of Tokyo-Mitsubishi’s Chris Rupkey said. “Slack in the economy isn’t just going away, it’s all but evaporated”
The piece of the labour market recovery that has been missing is wage gains, and the latest NFIB report showed that 25% of firms reported compensation increases over the last three months while 17% expected to increase compensation over the next six months.
In a note to clients following the report, Ian Shepherdson at Pantheon Macro wrote, “We have argued since the crash of 2008 that the economy cannot recover properly until the small business sector normalize. And, finally, it has.”
Derek Lindsay at BNP Paribas added that the increase in net compensation in the NFIB report ran counter to the weak wages seen in Friday’s jobs report. Earlier on Tuesday, we highlighted comments from Goldman’s Kris Dawsey that indicated that the decline in wages in December’s jobs report may be due to calendar quirks and other factors that make the decline less problematic that previously thought.
Torsten Slok at Deutsche Bank circulated the following chart after the NFIB data that shows the relationship between the NFIB compensation data and the employment cost index, or ECI.
NFIB has traditionally served as a leading indicator for the ECI, which is what the Fed uses in its economic dashboard — not average hourly earnings, which is the number that disappointed last week — and so Slok’s chart is something that labour market bulls will want to see.
In a note to clients last night, Shepherdson wrote that the ECI report, set for release on January 30, is the report for the market to look at.
“We can’t stress the importance of this report enough, especially because the third quarter ECI wage numbers were much stronger than the hourly earnings data,” Shepherdson wrote.
“If this is repeated in the fourth quarter, it will become much easier for the Fed’s hawks to make the case convincingly that the true trend in wage growth is both picking up and is stronger than shown by the hourly earnings data.”
Shepherdson added, however, that in his view a pickup in wages isn’t a necessary precondition for the Fed’s first rate hike and that the drop in unemployment — which fell from 6.7% to 5.6% from December 2013 to December 2014 — will be enough to see the Fed enact a “cautionary increase in rates in the spring.”
On Tuesday we also got labour data from the Bureau of Labour Statistics’ November job openings and labour turnover survey, or JOLTS report, which showed that job openings rose to 4.97 million in November, another post crisis high.
Shepherdson called the increase in job openings since the spring “nothing short of spectacular” adding:
“Job openings are rising even faster than the unemployment rate is falling, pushing the Beveridge Curve — which links job openings to the unemployment rate — even further away from normal. It has been an article of faith at the Fed that the curve would shift back, but we see no evidence of this at all. The further the curve shifts, the greater is the chance the wage pressures intensify, and soon.”
And so in short, just a great morning for the labour market and the economy.
The next big reading on wages and the labour market comes with the ECI report on January 30, and as this data appears to be improving, and quickly, the big question looming is how the Fed feels about all this good news.
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