VIPs
- Skilled labor is the scarcest at the last gasp of an economic cycle; small businesses are having to pay up to attract talent yet their plans to increase compensation in the future are crumbling resulting in the most inverted compensation curve in history
- Recessions occur after the Treasury yield curve and the small business compensation curve (between current and planned income pay) steepen; these curves are only flashing yellow at the moment
- Good unemployment – unemployed job leavers who’ve been out of work for less than five weeks – peaked in 2018’s first quarter leaving small businesses scrambling to source labor; the NFIB reported that 88% of owners reported few or no qualified applicants for positions
- Over the last three cycles, very short-term job leavers have peaked between two and eight quarters prior to the widest point on; this indicator is already four quarters past its peak
A few years back in a New York Times Magazine piece, Ben Zimmer penned a delightful etymological history of the phrase first attributed to a 1546 Proverb by John Heywood: “Wolde ye bothe eate your cake, and haue your cake?” A plainer English Russian translation posits that, “You can’t sit on two chairs,” while the boisterous Germans (really?) contend that, “You can’t dance at two weddings.” It is true that life foists choices upon us we’d rather not make. And yet, our innate selfishness drives us to desire two contradictory things at once. Lucky for us, we can be a bit more succinct in today’s Daily Feather so that we can deliver the same message in two ways, pictorially, that is.
Today’s double emphasis is all about carrots, great big carrots small businesses are dangling in front of potential employees. We know this is a natural outgrowth of the last gasp of the cycle, when skilled labor is scarcest. Small businesses will still feel a sting as they have to pay up to attract talent.
This dynamic was on full display in the latest National Federation of Independent Businesses (NFIB) Small Business Jobs Report which revealed a record share of small business owners (36%) raised employee compensation in January. You might have quickly deduced that upside is in the pipeline for two key wage inflation measures – average hourly earnings and the employment cost index. They both hit cycle highs in 2018’s fourth quarter. Unfortunately, that’s not the case. The fewest small businesses (20%) since the fourth quarter of 2017 plan to raise worker compensation. Anyone else pick up the scent of a turning point in the air?
Something is clearly upside down. Nearly double the number of small businesses are increasing compensation now vs. those who plan to do so in the future. The -16% spread is the most inverted on record (see first chart above). In past business cycles, the tightest spreads reflected the late-cycle backdrop, just like inverted yield curves (2s/5s illustrated).
You know the drill. Recessions ensue after the yield curve steepens. The same is true for the small business compensation curve. In true QI fashion, we’re ahead of the curve given these steeper signals from Wall Street and Main Street are only flashing yellow.
Shall we have our way with the same data in a different way? Shift your eyes to the second chart where we flip the compensation curve on its head. As cycles mature, small businesses are more willing to supply higher wages acceding to workers’ demands for higher wages. That demand manifests in rising “good unemployment,” which fuses unemployed job leavers with those who are out of work less than five weeks, just enough time to jump ship for better pay.
The interplay between these two measures of wage supply and demand are exposing the shortages of warm bodies with the right credentials. Why? Because good unemployment peaked in 2018’s first quarter. Workers aren’t as willing to test the labor market waters as they were a year ago, meaning small businesses have a smaller pool of candidates from which to draw. No wonder the NFIB reported “88% of those owners reported few or no qualified applicants for the positions.”
Good unemployment is a reliable leading indicator for turning points in the compensation spread. Over the last three cycles, very short-term job leavers have peaked between two and eight quarters prior to the widest point for the compensation curve. As of today, we’re already four quarters past the good unemployment peak. A peak small business wage signal should flicker by this time next year at the latest.
Four quarters is an eternity for financial markets. But when searching for turning points in the wage cycle, having such extended clarity affords those making tactical investment decisions the delicious luxury of having their cake and eating it too.