August Employment Report

KEY DATA:  Payrolls: +235,000; Private: +243,000; +134,000; Unemployment Rate: 5.2% (down 0.2 percentage point)

IN A NUTSHELL: “Don’t jump to conclusions over one less than expected report, the economy is still creating lots of jobs.”

WHAT IT MEANS: Wow, did economists blow this one.  Total payrolls rose by almost half a million less than expected.  I had one of the lowest estimates, but I was off by 150,000, which is still pretty bad.  So, has the economy slowed sharply? Is the Delta variant having a major impact on job growth?  I don’t think so, though it is too early to tell.  First of all, the July and August gains were revised upward sharply, and the three-month average is 750,000.  This is massive.  Almost 62% of the sectors posted payroll increases in August and that is really good.  The real surprise was leisure and hospitality – it created zero jobs.  That said, the sector is now at ninety percent of the job total it was in February 2020.  It is still 1.9 million below its peak, but everything considered, that is not that bad.  There was a decline in retail, though it is hard to know what is going on there.  Finally, state education, not local education, payrolls fell.  Local school districts added workers.  So don’t read too much into the government decline.

Maybe more importantly, the unemployment rate declined again, which was a very positive development.  The fall was driven by all the right reasons: Unemployment fell sharply, the number of employed skyrocketed and the labor force rose, though only moderately.  Once the rate gets below 5%, and we are closing in on that, the issue of full employment will be raised.  We are in a drum-tight labor market already, and unless we see the labor force start growing much more rapidly, the shortages will persist for an extended period.

IMPLICATIONS:  I have little doubt that those who focus on one month of data will start saying the economy is slowing, the Delta variant is bashing growth, and woe is me.  But I will repeat what I have said for decades, don’t let a single number define economic conditions.  The past three months the economy added 2.25 millionThe unemployment rate has fallen by 0.6 percentage point, despite a small rise in June.  That is quite large given the level of the rate.  The number of job openings exceeds the number of unemployed workers.  This report may have been disappointing, but only because economists were unrealistic on the ability of the economy to create huge numbers of new positions every single month.

So, why were we wrong?  First of all, we didn’t believe what the markets were telling us.  The huge labor shortage should have been a major warning sign that the lack of workers is restraining hiring and until the supply increases, there are only so many people that can be hired.  Second, we really are giving little value to the simple realities that it took a decade of moderate growth to get to the 2020 economy and returning to that level may take a really long time.  You don’t collapse and recover everything quickly. 

Finally, we didn’t consider the problem I have talked about before: The seasonal factors may be screwed up because of the nonseasonal job changes last year created by the reopening of the economy.  When nonseasonal issues persist for an extended period, as they did last year, the monthly seasonal adjustments can expect job changes that are not likely to be repeated.  Mathematically, the “mistakes” wash out over the course of the year, but for any individual month, they can create weird numbers.  We need to look at the three month-moving averages to smooth out the misses.  Three-quarters of a million jobs a month is fantastic and that’s where we were for the past three months. 

The problems of misplaced expectations and technical issues create real problems for the Fed, which seems to be leaning toward starting to taper its asset purchases.  Traders are rarely long-term thinkers, and economic commentators don’t usually have the time or space to get into the details of the issues, so they go with the current.  The result is a perception that the economy may be slowing.  I am not arguing that everything is beautiful.  It isn’t.  The Delta variant is bringing back uncertainty about going into stores and restaurants.  It is keeping some workers out of the labor market because of health fears or childcare issues. It is causing consumers to spend more cautiously.  It is slowing the reopening of offices, which impacts businesses in densely populated areas and extends the changes in demand for goods and services on the part of those working from home.  And going forward, there is the impact of ending the supplemental unemployment payments.  Together, these imply the economy could post slower growth over the second half of the year than expected. 

The Fed knows it needs to pull back its massive liquidity add.  But timing matters, so today’s report could push back the announcement a little.  But it is coming, unless Delta or another variant creates even more massive problems that we are currently experiencing.