Another Sign That The Labor Market Is About To Go Into Overdrive

Jobs Week officially kicks off today when Challenger and ADP come out with their numbers.

Yesterday we noted that withholding data pointed to a strong march.

Here's a little more to get excited about, via Deutsche Bank:

While the final print on GDP generally does not attract a lot of attention from the markets, it takes on added importance for the Q4 data because it contains the initial report on economy-wide corporate profits. Last week's report showed economy-wide corporate profits rose 9.7% annualized in Q4 2010, which was roughly twice what we were expecting. Since the recession ended, profits have grown at a sturdy 27% annualized pace. Profit growth is likely to moderate as productivity slows and input costs (including labor) continue to increase; nonetheless, the broadening economic expansion should hold profits comfortably in positive territory for some time to come.

The trend in profits is an important development with respect to the economic outlook, because corporate profit trends are critical drivers of private sector hiring and investment decisions. The impressive growth in profits thereby points to a significantly stronger pace of hiring in the quarters ahead. Case in point, the relatively soft labor market recoveries following the recessions of 1990-91 and 2001 were largely explained by the fact that profits per employee were unable to rise above trend in the early stages of the expansion. Note that this is not the case at present, as profits per private sector employee are at an all-time high-well above their pre-recession peak. As the following chart illustrates, profits are a useful leading indicator of private sector hiring. Upon adjusting for a two-quarter lead on the former, the correlation between the two series is an impressive 72%. Based on this relationship, private sector hiring should be roughly 6% higher (in year-on-year terms) by mid-year compared to 1.4% y/y as of February. This is far more aggressive than we are forecasting. Indeed, if payrolls accelerate to around 225-250k per month, private sector hiring will be roughly 2% higher by midyear.

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