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Labor Trends Lead To Earnings Growth But Will The FOMC Derail The Economy?

Summary

The labor market is beginning to boil.

Wages and consumer spending are steadily improving.

Labor trends will fuel earnings, adding to momentum.

Economic boom is on the horizon.

Will the FOMC derail it?

Labor trends are strong, healthy and leading to economic expansion and new highs for the broad market. It is inevitable, economic momentum has reached a velocity at which it feeds itself. Job availability is strong, more jobs means more people working, more people working means more money in the economy, more money in the economy leads to economic health, economic health lead to profit, profits lead to investment, investment leads to expansion, expansion leads to new jobs and it all leads to a rising market.

Labor, A Sleeping Beast Ready To Wake?

The Kansas City Federal Reserve Index of Labor Market Conditions is perhaps the best measure of the labor market. It is a composite of 24 major labor gauges all watched by the FOMC. The index declined in March but is trending near 6 year highs, the activity index fell 0.03 to -0.02, just slipping below the long running average by a hair. The index only recently reached 0, equal to the average, and is now indicating a healthy labor market if not full employment. Momentum also declined but remains well above average.

On an historical basis whenever the KC Fed LMCI crosses above 0 from below it precedes a time of economic expansion. The most recent examples are in '93/94 leading up to the DotCom bubble and then again in 2003 which led up to the Housing Bubble and Global Credit Crisis. Does this mean we are heading for a bubble? Maybe, probably, however that is still a few years off at best. The point today is that labor conditions are healthy, much healthier than many give credit, and leading the economy into expansion.

Digging deeper into the report other signs of labor market health exist, indicating low levels of turnover and a high availability of jobs. The #1 positive influence to activity over the past 6 months is the quits rate. The quits rate is a measure of people leaving work voluntarily, the assumption being they are confident of new or better work, and is widely considered to be a sign of health.

Other contributing factors to activity include the Labor Participation Rate and Temporary Hires. Positive factors influencing momentum include LPI (#1) and quits (#2) expected availability of jobs, the Challenger report on lay-offs and job creation, both ADP ((NASDAQ:ADP)) and NFP. On an individual basis any one of these could be dismissed but together indicate a labor market in which jobs are available, people are getting hired and employees are mobile.

The quits rate is an interesting component of the JOLTs report. JOLTs, Job Openings And Labor Turnover, is a measure of job availability, hirings, firings and other bits of data. It shows that job openings have been trending near 5.5 million over the past few months, record highs. The number of openings fell in the past month, but the loss is due to an increase in hiring. Hiring increased in March to 5.4 million monthly, a high not seen since November of 2006. The quits rate held steady near 3 million and 9 year highs.

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