Economy may be shifting gears

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INDICATOR: December ADP Payroll Estimate and Conference Board Help Wanted Online Index

KEY DATA: ADP: 238,000; Small: 108,000; Medium: 59,000; Large: 71,000/HWOL: up 125,600

IN A NUTSHELL: "If Friday's employment report is anywhere near what the private sector number crunchers think it will be, the economy could be changing gears even faster than I thought."

WHAT IT MEANS: It's a new year and another chance for my optimism to be fulfilled. Last year, tax increases, sequestration and political chaos kept a clearly improving economy from breaking out. Without those restraints, or at least with fewer of them, we should be able to reach what seems to be the mythical strong growth phase sometime during this year. The best sign would be job gains that move toward the 250,000 per month range and that might be coming. ADP estimates that the December private sector payroll gain could be very strong. Interestingly, construction is supposed to be leading the way. My estimate of a roughly 220,000 increase is lower only because I thought the cold weather might have restrained building activity. ADP also found that manufacturing and the service producing segments of the economy added lots of workers. Supporting the view that the Friday report could be good was a solid increase in online help wanted ads. The Conference Boards' survey also indicated that thirty-six states posted increases in openings.

MARKETS AND FED POLICY IMPLICATIONS: ADP has been reasonably close in its recent estimates and the December estimate, in combination with the growing openings, suggests a Friday payroll increase that would make an awful lot of people happy. If that comes attached to an unemployment rate of 7% or lower, the Fed's decision to start tapering in December will look awfully good. One note of caution is that the unemployment claims numbers were elevated in December and they don't point to as robust a report as today's data might imply. So we should go into Friday cautiously optimistic. I will be watching the unemployment rate more carefully going forward, regardless of the arguments against its validity. The difference between the unemployment rate and full employment provides a relative measure of slack in the labor market. We need that slack to largely disappear so sharper gains in wages can occur and income, spending and growth will accelerate. That is coming this year and it is needed if the equity markets are to hold the huge gains they made in 2013.

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