KEY DATA: Jobs: +850,000; Private: +662,000; Leisure and Hospitality: +343,000; Unemployment Rate: 5.9% (Up 0.1 percentage point)/ Trade Deficit: +$2.2 bil.; Exports: +0.6%; Imports: +1.3%
IN A NUTSHELL: “Strong growth in payrolls reflect the reopening of the economy, but the failure of the labor force to grow strongly is a real concern for businesses.”
WHAT IT MEANS: Another jobs report, another sign that the economy is getting back to more normal conditions. Payrolls surged in June, which should have surprised nobody. The removal of restrictions is allowing firms to rush out and hire, if they can, new employees. The increases were in the sectors that were expected: restaurants and hotels, and because firms cannot find workers, temporary employment services. Retail hiring was also solid. There was also a huge increase in government hiring, all in education. Don’t expect that to be repeated. But otherwise, the numbers were mediocre. The manufacturing, health care and transportation sectors added a modest number of workers and construction was down.
On the unemployment front, the rate rose modestly. But the labor force is not growing nearly as rapidly has expected: The participation rate was flat over the month and up modestly over the year. As a result, wages rose solidly.
The trade deficit widened sharply again in May. While exports increased, the reopening of the economy is sucking in goods from the rest of the world at a massive pace. The deficit should continue to widen as the U.S. economy is expanding faster than most of our trading partners. However, adjusting for inflation, it doesn’t appear as if trade will restrain growth significantly in the second quarter. IMPLICATIONS:The headline employment number was impressive, but as usual, when you look at the details, there was less there than meets the eye. Much of the job gain came from the leisure and hospitality sector. The total number of workers in this segment of the economy remains about 2.2 million below the peak set in February 2020. But it has recovered about six million of the 8.2 million of the jobs lost due to the shutdowns and it is unclear how many more jobs will be recovered. Undoubtedly, a large number of positions were lost due to firms disappearing and it will take years to regain those jobs. So, look for the leisure and hospitality sector to add workers at a decelerating pace as we move through the summer and into the fall. In addition, the pattern of hiring in the education sector was upset by the pandemic, so the seasonal adjustments may be off. Don’t be surprised if that sector stops adding workers for a while. On the other hand, construction looks to be strong, so we should see a rebound there. Still, with education and leisure and hospitality accounting for about two-thirds of the June payroll gain, the outlook is for a lot slower job gains in the months to come. There is also some concern over the limited rise in the labor force in the face of growing labor shortages. Some of that may be due to altered seasonal factor that will wash out as the year proceeds. But the real question is what extent the expanded unemployment compensation has kept people on the rolls for an extended period?We should start seeing over the next few months if that was the case as states are eliminating those extra payments and they end in September. That could lead to a jump in those looking for jobs, though don’t be surprised if it also leads to a minimal decline in the unemployment rate. It takes time to find a job and a surge in job seekers usually leads to a rise in the number of workers unemployed, at least for a period of time. To summarize, the labor market is getting better, but don’t expect massive jobs gains to be repeated and don’t be surprised if for a while, the unemployment rate makes little progress in returning to full employment. That is just the way things work. What we should watch closely is the cost of labor. If wages keep rising sharply, firms will have to continue passing those expenses on to consumers. That would lead to an extended period of above trend inflation and if it runs through next year, which I think is possible, the Fed may be forced to move sooner rather than later.