July Employment Report

KEY DATA:  Payrolls: +943,000; Private: 703,000; Revisions: +119,000; Leisure and Hospitality: +380,000; Government: 240,000/ Unemployment Rate: 5.4% (down 0.5 percentage point); Hourly Wages: +0.4%; Over-Year: +4%  

IN A NUTSHELL: “The labor market is tightening sharply as workers are returning to restaurants and schools.”

WHAT IT MEANS: July was a good month for both businesses and workers. Firms continue to expand their workforces, despite all the complaints about the lack of availability workers.  The economy added an average 940,000 new employees over the past two months, so it looks like there are plenty of qualified people searching for jobs – and finding them.  In addition, the increases of the previous two months were revised upward significantly, implying the hiring was stronger as the months went on.  The payroll increases were spread across the entire economy, with the 67.5% of industries reported gains.  That said, there was a somewhat unbalanced increase, as nearly two-thirds of the new positions were in two areas: Leisure and hospitality and government.  Most of those were in restaurants and schools.  Going forward, it is not clear how many more workers will be hired.  Indeed, leisure and hospitality total payrolls are now only about ten percent below their peak in February 2020.  Local education employment is within two percent of its peak.  So, it appears that the massive job gains are behind us.  

On the wage front, hourly wages continue to rise solidly, both over-the-month and over-the-year.  With employees working longer hours, their weekly pay is also surging.    

As for the unemployment picture, there seemed to be some “make-up” in the numbers.  With all the hiring that had been going on, it was surprising that the unemployment rate hadn’t fallen more.  Well, whatever undercount had occurred is now gone.  The unemployment rate cratered, and for all the right reasons: The labor force participation and labor force rose, employment skyrocketed, and unemployment plummeted.  The duration of unemployment is also falling, which shows that people are getting pulled off the rolls.  Some of that may be due to states ending the supplemental payments, but we don’t have specific data on that yet.    IMPLICATIONS:This was a great report, but it did contain some warnings.  Given how many of the new positions were in sectors that are nearing their pre-pandemic highs, job gains anywhere near what we have seen over the past three months are unsustainable.  Economic growth, not reopenings will have to take over.  That is actually good, as we will start getting a picture of what the fundamental economy looks like.  Right now, we are still in the recovery phase.  Businesses will have to start expanding, not returning to previous levels, for payrolls and growth to remain strong.  That change in the driving force for job gains is coming as the government is beginning to cut back on their income supports.  Even if the infrastructure and budget bills get passed, their impacts are months if not years out.  Investors should start lowering their expectations for job gains and economic growth, especially when we get to the fall and winter.  That is not to say growth will stall; there is little reason to expect that.  But six percent is unsustainable and three to four percent, which we could get over the next year, means employment increases less than one-third we have recently seen.  Those rates are still somewhat outsized, since trend growth is closer to two percent and trend job gains is probably in the two hundred thousand to two hundred fifty thousand range.  Which means the economy is looking good going forward, just not looking like it has over the past few quarters of reopenings.  And then there is wildcard, the Delta and other possible variants.  The Fed might worry that growth could remain so strong that full employment is reached sooner than the members expect.  On the other hand, the pandemic is not over.  My guess is that the Fed is willing to let the economy run hot for an extended period and not panic if inflation is elevated as well.  It is a lot easier to slow growth than to accelerate it when rates are so low, especially if the government’s massive income supports disappear.  That creates uncertainties and if the Fed is to make a mistake, it is likely to err on the side of too much growth rather than too little.