At the end of the day business hiring comes down to one thing – will hiring more employees help the firm leverage its operations in order to generate greater profits? The answer to that question involves many variables, but none is more important than sales. A firm that doesn’t generate sustainable long-term revenue growth will be forced to reduce hiring, layoff employees or find other sources of cost cuts. Revenue is ultimately the key to any good business model.
So, when I look at the chart below there’s really only one conclusion – because sales are stagnating it’s likely that businesses will protect their margins by cutting costs (the largest of which just so happens to be the workforce). With sales at 1.7% year over year we’re starting to get to a point where the bottom line is going to start suffering due directly to top line sluggishness. That means most businesses are unlikely to look at this environment and feel confident about expansion in hiring. Instead, they’ll either remain cautious or actually begin laying off workers if the trend persists. Either way, it’s hard to imagine that the labor market is about to pick up a huge amount of momentum when the most important part of the corporate income statement is sending such a clear caution sign….
I have no idea what this morning’s job report will say and most of the people who play the NFP guessing game are just throwing darts blindly. But this longer-term trend does not bode well for the labor market.
Chart via Orcam Investment Research:
