Worker Demand Jolted By Strong Economy

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Includes: DIA, IWM, QQQ, SPY, VOO, VTI, VXX, XHB, XLF, XLI, XLV
by: Markos Kaminis
Summary

Job openings increased significantly in June, pointing to strong demand for labor.

Hires exceeded separations, indicating continued job creation on net.

The quits rate remained healthy, far exceeding layoffs and discharges, indicating worker confidence in job opportunities.

The takeaway from the JOLTS report is that a strong economy continues to drive labor market tightness.

Compensation inflation should be right around the corner, but it is a healthy source of inflation.

The labor market is being jolted by a healthy economy, as indicated by the latest Job Openings & Labor Turnover Survey (JOLTS). My takeaways from the report were that the demand for labor is strong, and that demanded skillsets are in shortage. The result of this should be pressure on compensation inflation as employers must offer greater incentives to acquire the human resources they need.

Job openings amounted to 6.163 million at the end of June, well above economists' expectations for 5.6 million. Openings were up 461K from May's revised level, indicating that demand for employees is strong and increasing.

Industry strength was seen in professional & business services (+179K), health care (NYSE: XLV) & social assistance (+125K) and construction (+62K) (NYSE: XHB). Regional demand was strongest in the Midwest and West U.S.

The casual reader of the data might have seen the decrease in hires as a negative. However, hires were relatively unchanged save for a significant (-29K) decrease in educational services. Regionally speaking, only the Northeast saw a significant decrease in hires.

The decrease in hires and increase in job openings points to a shortage of qualified employees for the specific skillsets demanded by American businesses today (NYSE: IWM). That is a good thing for wage rates and personal income levels.

We can also see the strength in labor in the "quits" rate. Separations includes quits, layoffs and discharges, and other separations. Given that quits are made by choice, it's generally assumed that as the rate of quits increases it implies worker confidence in other job opportunities.

Total separations were relatively unchanged at 5.2 million in June. Quits were little changed at 3.1 million in June, and the quits rate was 2.1%. Quits decreased in finance and insurance (-21K) though (NYSE: XLF). Quits significantly outnumbered involuntary layoffs and discharges in June (1.7 million), which was little changed from May.

When the number of hires (5.4 million) exceeds the number of separations (5.2 million), employment rises. Thus, over the last 12 months, there has been a net employment gain of 2.3 million jobs. But we already knew that, as unemployment has continued to drop this year to 4.3% in July.

Tightness in the labor market is indicative of the health of the economy. While inflation has been absent up until now, I continue to expect it will arise from the labor market. That's a healthy source for inflation, as job growth and duration should spur consumer spending increasingly with time. This is why I continue to foresee stronger economic growth in the second half of 2017 and in 2018. For more of my work on the economy and the markets, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.