Umpteenth +1

“Insanity is doing the same thing over and over again and expecting different results”
-Albert Einstein  

What about saying the same thing over and over again? 

There’s no hard consensus around the requisite frequency you have to say something for it to count as having said it umpteenth times …. but, suffice it to say, we’ve effectively calibrated our #BrokenRecord impression on the way to running out of original ways to paraphrase ourselves with respect to our #GlobalDivergences theme and the attendant implications for the $USD, domestic-centric equity exposure and the rising May-laise currently engulfing the EU/China/EM complex.   

Here’s the thing. I know choking down another overcooked, implicitly self-congratulatory parsing of the latest manifestations of Global Divergences may or may not be how you want to start your Wednesday.   

But front-running phase transitions in global macro is the whole goal of active analytical alpha.  

And if you think the traversal to other side of the longest stretch of synchronized global growth ever, which also happens to be occurring concurrent to an attempt by the global central bank collective to extricate itself from the role of vol warden after a decade of unprecedented, price insensitive support to assets and alongside a burgeoning drought in dollar liquidity as the confluence of Fed balance sheet unwind and unprecedented, fiscal stimulus related treasury supply conspire to squeeze an OUS world awash in dollar debt, depreciating currencies and rising interest rates doesn’t represent potential phase transition conditions with tangible investment implications then, well, your P&L will eventually be forced to choke down more than just Broken Record investment theme missives.  

And if you’re a run-on sentence enthusiast: you’re welcome.  

Anyway, it’s official … there are now more job openings than there are people who need a job.   Although “official” and “true” aren’t necessarily synonyms.  

Back to the Global Macro Grind ….. 

Recall why we care about the Job Opening and Labor Turnover (JOLTS) data:  The JOLTS data comes out on a month lag to the NFP report and provides the internals on the gross flow of both hirings and separations.  As we’ve highlighted, a hallmark of an efficient and well-functioning labor market is a fluid flow of workers – job openings and the creation of new positions is a direct measure of the economy’s health (or perceived health), and the more that companies are hiring and creating new positions, the easier it is for job-seekers to find work and for skill and need to find their most productive match.  Conventionally, the churn and underlying dynamism of the labor market sits as a proxy for the health of the broader Macroeconomy.  

As it relates to the April data specifically:

• Churn: On a gross basis, 5.58 million people were hired in April while 1.7 million were laid off or fired and 3.35 million people quit their job. Total Hires + Quits (our proxy for churn or total labor market dynamism) rose to a new all-time high at 8.93 million.    
• Job Openings:  Total Job Openings rose to a new record high at 6.698 Million.  This compares with Total Unemployment (as defined by the U3 rate) of 6.35 Million in the corresponding April employment data (6.07 Million in the latest May data) … pushing the openings/unemployment ratio well above one. The obligatory caveat is that Openings may be overstated in the latest cycle as it’s become virtually costless to post a job opening (relative to the intensity of doing so historically) so employers may just be casting a wide net to see what they may catch without having an acute need or desire to hire. 
• Available Workers per Job Opening:  Available Workers (the sum of Unemployed + those Not in the Labor Force but Want a Job) per Job Opening dropped to 1.71 in April, marking another lower all-time low.  This measure is probably a better reflection of the underlying reality (i.e. the openings to unemployment ratio isn’t really greater than 1), but lower all-time lows carries the same broader conclusion.
• Quits:  the quits rate held at 2.3% with 3.35 million workers voluntarily leaving their job – a trend which continues to grind to higher cycle and all-time highs. 

The continued march towards tautness reflected in the JOLTS data accords with the preponderance of labor data which continues to suggest increasing labor scarcity and percolating wage inflation:

1. Quits vs Job Switchers Wage Growth:  The Chart of the Day below plots the Quits Rate from the JOLTS data vs. Wage Growth for Job Switchers (Atlanta Fed data).  As can be seen, wage growth for Job Switchers is now running north of 4% Y/Y.
2. Push-Pull:  There always exists a healthy tension with respect to late-cycle employment and wage pressure, it may just be more pronounced in the present instance.  A tighter labor markets against a backdrop of solid economic activity means the balance of power inherently shifts from employers to employees with a growing demand-supply imbalance pushing prices (wages) higher, particularly for those with experience and in-demand skills.  That dynamic is evident in wage growth for Job Switchers referenced above.  But employers are also increasingly moving down the worker quality supply chain as labor scarcity becomes more acute with the unemployment rate for high-school grads continuing to breach new lows and as the long-term unemployed re-enter the labor force in larger numbers.  To the extent the latter represent a growing fraction of the newly employed it will have a dampening effect on aggregate earnings growth.  If you only have a high-school degree, haven’t worked in 5+ years, and carry no relevant experience, you’re probably not showing up and demanding premium comp.    
3. NFIB Compensation:  alongside cycle highs in the “Jobs Hard to Fill” series of the NFIB Small Business Survey, the “Compensation” component continued to accelerate, marking a new all-time high in the latest May reading.  Compensation inflation may not be what it used to be but it’s certainly directionally indicative.
4. ECI and Fed Regional Surveys:  The 1Q ECI Wage and Salary Cost data accelerated to a new cycle high at +2.74% Y/Y in 1Q and the Wage and Salary component in Fed regional Survey data (for those that report it) is sitting at a 14-year high in the latest month.
5. ISM:  The sequential strength in both the ISM manufacturing and ISM Services data for May came with an increase in both New Orders and Backlogs. In fact, the Backlog component of the ISM Services survey rose the most in 8 years to its highest level ever at 60.5.  The increase in New Orders and Backlogs suggest nearer-term activity will remain solid but also suggests that some combination of increasing labor scarcity and supply constraints are working to dampen the magnitude of output growth here currently. 
6. May NFP:  The acceleration in aggregate hours growth along with the acceleration in average hourly earnings in the May NFP data imply a moderate acceleration in aggregate income growth in May.  By extension, the baseline expectation for consumption growth remains positive nearer term, particularly with easier base effects for household spending supporting rate-of-change strength into 3Q18.

This is getting long so to quickly and simply tie it back to the #GlobalDivergences theme. 

The rebound in the May ISM’s, the acceleration in income and consumption growth and the potential for a strong 2Q headline GDP print underscore the burgeoning U.S. vs OUS Growth divergence while slowing growth and political risk threaten to recharge the Policy Divergence vector as Draghi is forced to consider walking back the ECB Taper timeline, either rhetorically or actually.    

Remember also, the domestic data has been better sequentially while still trending lower off-peak …. but in a world of relatives, to escape the bear you only have to run faster than the other guy (i.e. U.S. relative growth spread widening = capital flows). 

In other words, Divergences in May won’t go Away.   In other, other words, Umpteenth +1. 

Christian B. Drake
U.S. Macro Analyst