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Hitting the High Side of Labor Market Constraints - July 10, 2018

One of our favorite data sources, the NFIB Small Business Optimism Index came out Tuesday and while the Index declined from May, it was

 “Overall, a very solid report, with the Index among the highest readings in 45 years” and continues on a streak that was worthy of adjacent glowing adjectives,

”Since December 2016, the Index has averaged an astounding, unprecedented 105.4, compared to 92.4 for 2009-2016”.

On a more granular level, some of the components, such as inventory, slowed. But note running down inventory isn’t negative but rather a sign that demand is outstripping supply. Indeed, the report reassured readers that “the stock reductions reported were indeed a result of strong sales, not a result of less certainty.” Capital spending had similar dynamics “Fifty-nine percent reported capital outlays, down 3 points from May, but solid.”

The Employment reading, which we’ve highlighted before, received some specific attention,

 “Small business owners are pushing ahead with an expansive agenda, trying to figure out how to produce more with a restricted supply of labor. Unemployment is about as low as it can go.”

 “Thirty-six percent of all owners reported job openings they could not fill in the current period, up 3 points matching the survey record high set in November 2000”, with a record 55 percent of respondents, or 87 percent of those hiring or trying to hire, reporting that there were few or no qualified applicants.

We’ve covered some of the techniques companies are using to ensure adequate labor supply, such as offering perks and sign-on bonuses, but a new strategy may be gaining ground as employers seek to expand the applicant pool: relaxing pre-hire drug testing standards. While some companies aren’t trumpeting this shift, as covered in this article from the Des Moines Register, others, such as Caesar’s Entertainment, are open about the difficulties they face in hiring candidates following Nevada’s recent legalization of recreational marijuana. According to a recent Las Vegas Review Journal article, “The need for good workers coupled with the state’s recent legalization of recreational marijuana use has ended pre-employment testing for pot.” Unsurprisingly, data from Quest Diagnostics, which performs drug tests for employers found “Increases in positivity rates for marijuana in the general U.S. workforce were most striking in states that have enacted recreational use statues since 2016”, with Nevada’s positivity rate jumping 43%. Potential Vegas goers shouldn’t be too worried though, certain jobs are required by federal law to be screened, and “If somebody is believed to be using or high at work, then we would continue to screen for marijuana and other drugs.”

P.S. Though the SBOI has a price component, which dropped slightly from May, there may be price fireworks later this week with PPI released Wednesday and CPI released Thursday.