All posts by joel

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.   

August Consumer Confidence and June Housing Prices

KEY DATA:  Confidence: -11.3 points; Current: -9.9 points; Expectations: -12.4 points/ Case-Shiller National Prices: +2.2%; Over-Year: +18.6%/ FHFA Prices: +1.6%; Over-Year: +18.8%

IN A NUTSHELL: “Confidence is faltering and that raises some questions about the strength of the recovery going forward.”

WHAT IT MEANS:  What me worry?  Well, yes.  That seems to be the verdict, as the Conference Board’s Consumer Confidence Index tumbled in a sharp manner that mirrors what we saw in the University of Michigan’s Consumer Sentiment report.  The difference is that there the Michigan Sentiment number was even lower than the pandemic bottom reached in April 2020, while the Confidence Board’s Confidence level was still well above the low.  As was the case with the Michigan report, both the current conditions and expectations indices tanked.  In addition, household views about both the business situation and the labor markets, in the present and the future, were off solidly.  Household concern is rising sharply and if those worries persist, we could see some scaling back of spending.

On the housing front, prices seem to know no upper bound.  Both the Case-Shiller and Federal Housing Finance Agency home price indices rose sharply in June.  Over-the-year, both surged over 18.5%, an enormous increase, and the price gains are accelerating.  Is that sustainable?  Do you think that increases of 29.3% in Phoenix, 27.1% in San Diego and 25% in Seattle are sustainable?  Only three of the twenty large metro areas in the report posted over-the-year increases less than sixteen percent while eleven had price gains in over nineteen percent.  Can you say bubble?  If not, I will.

IMPLICATIONS: Confidence is falling, despite strong gains in jobs, solid increases in wages, and large declines in the unemployment rate.So, why are households feeling so uncertain?  The only logical reason is the rapid spread of the Delta variant and the worries that a major slowdown could occur.  That raises questions about using the confidence data to forecast consumer spending.  Usually, spending changes follow confidence changes when the source of the disturbance is related to economic factors.  While the Conference Boards measure about current and future jobs and business activity did decline in August, their levels are not signaling any major slowdown.  But the reports do raise the warning flag that if the pandemic worsens, and given the continued unwillingness of many to get vaccinated that is a real possibility, we could see people stashing away funds just in case.  That would mean at least a short-term easing in demand.  In addition, there’s the housing bubble.  The National Association of Realtors Housing Affordability Index is down nearly 16% over the year.  It is not just new buyers who are being priced out of the market, but current owners as well.  Those high prices may not be sustained.  Residential investment was a drag on the economy in the spring and it could continue slowing growth for some quarters to come.  If the pandemic leads not only to a drop in confidence, but also an unwillingness to go into stores and restaurants again, then consumption could falter as well.  We could see growth moderate faster than expected.  Which raises the question: When it comes to tapering, is the Fed behind the curve?  If you believe Chair Powell, the answer is no.  If you believe several the Fed Bank presidents, the answer is yes.Today’s numbers only confound the issue as they imply a slowdown in the future, which doesn’t help a data-dependent Fed.The next FOMC meeting on September 21,22 could be very interesting.

July Consumer Spending and Income, August Consumer Sentiment and Fed Chair Powell’s Jackson Hole Speech

KEY DATA:  Consumption: +0.3%; Disposable Income: +1.1%; PCE Inflation: +0.4%; Ex-Food and Energy: +0.3%/ Sentiment: -10.9 points

IN A NUTSHELL: “The Fed should start slowly tapering its stimulus sometime this year, but rate hikes are well into the future.”

WHAT IT MEANS: Before Fed Chair Powell’s greatly anticipated Jackson Hole speech is dissected, it is worthwhile understanding the condition of the economy from which he is operating.  The state of the economy is strong, though the expected moderation is at hand.  Consumption rose moderately in July, led by a robust gain in services demand. Goods spending, though, was down.  The microchip shortage continues to restrain vehicle sales and durable goods consumption tanked.  While the headline number was decent, the rise in spending was more than offset by another sharp increase in inflation.  Adjusting for the price increases, real spending declined.  That could change, though.  Led by the massive July job gain, which powered a jump in wages and salaries, after-tax (disposable) income skyrocketed.  Given the more moderate increase in consumption, the savings rate ticked up.  So far this year, it has averaged 14.7%.  Households have built up a nest egg to spend when the stimulus money runs out. 

Normally, when incomes rise, confidence follows.  That is not the case right now.  The University of Michigan’s Consumer Sentiment Index plummeted in August.  The final number was similar to the mid-month result, so there may some stability setting in – though at a level that is below the bottom hit on April 2020.  That says a lot.

Powell Speaks:  Strong job gains and continued government stimulus funding, including the Biden child tax credit, is supporting the economy.  Covid-19, though, continues to suppress confidence and especially expectations.  The battle between the two was a key point made today in Fed Chair Powell’s speech to the Kansas City Fed’s Jackson Hole Conference (held virtually).  The short story here is that some new ground was plowed, but what the Fed Chair said was pretty much expected.  The markets were looking for hints on when the Fed would start reducing (tapering) its purchases of assets.  This is the monetary policy equivalent of the open-checkbook policy being run by the federal government.  Not surprisingly, he didn’t say the taper was about to begin, but by commenting that “the substantial further progress” test has been met for inflation, as well as “There has also been clear progress toward maximum employment”, the stage has been set for the Fed to announce that they will start to cut back purchases of assets.  Barring a setback in the jobs situation, that could come most likely in the November or December FOMC meeting statement. 

To ward off another “taper tantrum” in the markets, as occurred in 2013, Mr. Powell spent most of his time explaining why he believes that inflation is coming back down to more normal levels.  He has been making the argument that the factors driving the surge in inflation were transitory for a while now, but his defense today was as strong as it gets.  I almost believe him.  Almost.  I am still concerned about what the longer-term trend in inflation winds up as and think it could wind up higher than the current Fed target of an average of 2% over time.  It might take another two years before we have a good idea if 2% holds, so it gives economists a lot of time to argue over the issue.  The fact that he made it clear that it would be a long time before the Fed’s balance sheet declines, adds to the belief that the Fed will allow inflation to run hot for the foreseeable future. 

So, what does this all mean?  The Fed is likely to announce that it is slowing, not ending, its purchases of Treasuries and Mortgage Backed Securities (MBS) sometime by the end of this year.  It will likely take all next year to taper the level of purchases and only then would it consider reducing its balance sheet and start raising interest rates.  The timing is unknown, but that seems like a logical one, as of now.  One final comment.  Jerome Powell has been a steady hand during the pandemic crisis.  He has taken a stand on Fed stimulus and has backed it up with strong economic arguments.  Yes, he seems to believe that supporting high and rising markets is one of the three Fed mandates, in addition to legislatively mandated maximum employment and price stability. That has caused the markets to depend upon and therefore demand continued Fed easy money.  That is a major concern going forward.  He was appointed by Trump, but I don’t think that will stop Biden from reappointing him.  His record is solid and not surprisingly, stories have it that Treasury Secretary Clinton supports him.  His term ends at the end of January, and he deserves to be reappointed. I suspect that announcement will be made later this year.

August Philadelphia Fed Manufacturing Survey, July Leading Indicators and Weekly Unemployment Claims

KEY DATA:  Phila. Fed (Manufacturing): -2.5 points; Orders: +5.8 points/ LEI: +0.9%/ Claims: -29,000

IN A NUTSHELL: “If the economy is softening, you cannot see it yet in the labor market, which remains drum-tight.”

WHAT IT MEANS:  Another day, another set of economic numbers that should drive investors crazy.  First, there was the Philadelphia Fed’s survey of manufacturers.  The index eased back in the first part of August, which was hardly a surprise.  Not because the index was anywhere close to the near-record high it reached in April, but because this index is crazy volatile.  So, ups and downs are taken as a given and when the change is as small as it was in August, then you have to say that conditions didn’t change much.  Indeed, the manufacturing sector in the Mid-Atlantic region is in pretty good shape.  New orders grew much faster, hiring remained robust and pricing power improved solidly.  If there was a warning in this data, it came from the special question section.  Respondents expect that they will have to raise compensation by 4% over the next year but will be able to offset that by an even faster 5% increase in prices.  These results are similar to the ones found in the May survey, except firms now think national inflation will run at a 5% pace over the next year rather than 4%.  That seems to point to rising inflation expectations, something the Fed should be worried about.  

If the Fed is going to start tapering, it should time it when the economy is still improving and it looks like we are in for more strong growth.  The Conference Board’s Leading Economic Index rose sharply in July, as every component added to the gain.  That is about as broad based as you can get.  Given how much the index has risen this year, the Conference Board expects “real GDP growth for 2021 to reach 6.0 percent year-over-year”.  It even thinks that 4% is likely in 2022.  That hardly looks like much of a slowdown. 

As for the labor market, new claims for unemployment insurance declined to a level that is very consistent with a strong economy and an unemployment rate at the current 5.4%.  That is, the market churn, (hires versus fires, quits, retirements etc.) that determines initial claims is pretty normal.   

IMPLICATIONS:Is the economy in good shape? Yes,but it is also true that it is not too hot, not too cold, and not just right.  Forget Goldilocks, bring on confusionSome of the data, including the housing and retail spending reports, have not been great.  But the labor market data have been really great.  And then there are the inflation numbers, which show no signs of subsiding.  The reality is that the economy is in transition and that is the way it is going to be for quite a while. So, expect some volatility in the data, especially when we get to the fall, which is when the labor markets will be moving from government manipulation to private sector actions. For investors, uncertainty is never a good thing, so don’t be surprised if we get some big ups and downs. And that may be in part because the Fed continues to find itself in a tough spot. Clearly, the economy is better than the members expected it to be, while inflation is worse.  That should mean it is a layup that tapering would begin this fall.  But the weak housing and consumption reports, which might just turn out to be temporary aberrations, means that investors are getting worried about the sustainability to strong growth.  If the Fed only had a dual mandate, maximum employment and stable inflation, then there would be no issue.  But the Fed continues to operate under its self-imposed, but never stated, triple mandate, where stable and/or rising markets are also a major factor in its decision making.  Chair Powell doesn’t want to spook the markets (i.e., investors), so he must get his timing right.  Yet when all is said and done, the Fed is likely to start cutting back on its liquidity adds sometime in the next six months.  The issue is not whether but how quickly, so the best thing is to assume it is going to happen and act accordingly.

July Retail Sales, Industrial Production and August Home Builders Survey

KEY DATA:  Sales: -1.1%; Ex-Vehicles: -0.4%/ IP: +0.9%; Manufacturing: +1.4%/ NAHB: -5 points

IN A NUTSHELL: “Despite household uncertainty affecting demand, the manufacturing sector remains strong.”

WHAT IT MEANS: Households have been shopping ‘till they dropped, but it looks like they dropped shopping in July.  Retails sales declined sharply, led by a major pullback in vehicle purchases.  Since we knew that vehicle demand was down significantly, the fall in overall sales was not a surprise.  What was disconcerting was the broad-based nature of the cutbacks.  People ate out a lot and bought electronics and appliances, but that was it.  There was a major increase in gasoline purchases, but there was also a major increase in gasoline prices, so we can discount that rise.  Otherwise, sales at most other types of stores, including the Internet, declined.   Consumers may be cautious with their money, but you could not tell that from the Fed’s industrial production numbers.  Manufacturing output was up in almost every segment.  Only the petroleum and apparel sectors were down.  While it was nice to see a burst of new production, manufacturing has been up and then down every other month.  The saw-tooth trend is up, but extremely uneven.

The housing bubble seems to be deflating.  The National Association of Home Builders’ index plummeted in August, led by a declines in both current sales and traffic.  I don’t know how many times I have said that “the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates”, so I am a little cautious about what comes next.  Clearly, the panic buying and huge price increases we saw over the past year had to come to an end – and it is doing just that.  It’s unclear, though, how big a slide will follow.  If there is a sign of hope, it was in the expectations component of the index.  It was flat.  Let’s hope the confidence that the developers are showing in the future turns out to be correct.         

IMPLICATIONS:  Is the economy slowing?  Yes.  Is that a surprise? No.  Is there cause for concern?  Not yet. The big problem facing the economy, once again, is the virus.  It is knocking the sox off consumer confidence, as seen by the huge decline in the early August University of Michigan Consumer Sentiment index.  Those that hoped the virus would disappear have been greatly disappointed.  And with schools reopening, the Delta virus affecting younger adults and children and the politics of dealing with the virus getting even worse, if that is possible, uncertainty is setting in.  The Census Bureau has developed an experimental state monthly retail sales report, which will be released in ten days, and it will be interesting to see if the impacts differ by cases of virus.  Just a few states account for a large majority of new cases and looking at those states vs. those where the virus is not as viral might provide some insight into how important the continued pandemic is on consumer decision making.  But there is also good news, as industrial production remains strong.  The issue isn’t the level of demand, as that remains high.  It’s just that the huge increases in sales were not sustainable and we have to get used to more normal patterns.  Overall, all, though, the risks going forward are to the downside.  The supplemental unemployment payments have only a few more months to go and with the government’s business support waning as well, we could see a slowdown in retail sales and a rise in business bankruptcies.  We are entering the transition phase, from massive government support to ultimate dependence on the private sector.  Biden’s eventual budget will not likely have a major impact for a few more months, so look for some additional large swings in the economic data.  Interestingly, those negative numbers could arrive just as the Fed is contemplating announcing its intention to reduce its asset purchases.  As is the case with most things in life, timing is critical and the Fed may be doing the correct thing, but not necessarily timing it well.   

July Producer Prices and Weekly Jobless Claims

KEY DATA:  PPI: +1%; Goods: +0.6%; Goods Ex-Food and Energy: +1%; Services: +1.1%/ Claims: -12,000

IN A NUTSHELL: “Wholesale price pressures continue to build and that argues for firms continuing to use their pricing power to overcome those rising costs.”

WHAT IT MEANS: Hey people, inflation pressures are not fading just yet.  The Producer Price Index posted another large gain in July, and that was the case even excluding volatile food and energy.  Food was the only major component where costs fell, but the sharp decline was offset by another major rise in energy costs.  Price pressures rose significantly in just about every major and minor component and every special index.  In other words, increasing producer costs are pressuring businesses in every nook and cranny of the economy. 

Jobless claims eased back again last week, and we are slowly moving toward a pace that would be expected in a strong economy.  How long it will take to get back to where we were before the pandemic hit is a different issue.  Then, the unemployment rate was below what most economists believe is full employment.  Now, it is still two percentage points above that record low level, even with the sharp decline in July. 

IMPLICATIONS: Is the Fed whistling past the graveyard?  Both retail and wholesale prices are rising sharply.  Some have argued that the “lower”, i.e., not as huge, increase in consumer prices is the start of the deceleration in inflation.  However, it is hard to make the case that the high inflation posted in July is better than the very high inflation we had been seeing.  Both are disturbing, to say the least.  The wholesale numbers only argue for at least a few more months of high consumer inflation.  Firms have pricing power and there is little reason to think they will not continue using it.  It has been so long since that was the case, that the conventional wisdom that the high inflation is temporary and we will get back to “normal” inflation without any long-term impacts, has to be called into question.  Investors believe that is true and Fed members continue to say the same, though some at the Fed are breaking ranks.  My view is that when you combine labor shortages, declining unemployment rates and rising wages with supply chain problems, excess demand and increasing input costs, you have the recipe for an extended period of inflation.  Interestingly, if the Fed is going to get back to an “average 2% inflation rate”, then the extended period of sub-2% inflation will have to be offset by an extended period of above 2% inflation.  That is where we seem to be headed.    

July Consumer Prices, Real Earnings and Help Wanted OnLine

KEY DATA: CPI: +0.5%; Over-Year: +5.4%; Ex-Food and Energy: +0.3%; Over-Year: +4.3%/ Real Hourly Earnings: -0.1%; Over-Year: -1.2%/ HWOL: +3.8%

IN A NUTSHELL: “It’s hard to get excited about a deceleration in inflation which goes from scorching hot to extremely hot.”

WHAT IT MEANS: Inflation surged again in July, but the increases were a little bit more concentrated in the volatile food and energy sectors during the month. Excluding those components, household costs were up solidly, but not ridiculously. The monthly rise was also the lowest since February, which I guess you can say is progress. I will not say that, since the over-the-year pace is still way too high. In July, the big increases were in almost all components of food and energy, as well as in new vehicles. Interestingly, services costs, including housing and medical services, rose more moderately. Used vehicle price increases also eased, though they are up 42% over the year.

With inflation so high, it should not be a surprise that it is cutting into household spending power. While hourly wages were up in July, when adjusted for inflation, they were down slightly. Over the year, consumer purchasing power is off solidly and that is not good news, especially with some of the government’s support programs about to disappear.

The strength of the labor market is clear and the surge in the number of jobs being advertised online only confirms that point. The Conference Board’s Help Wanted OnLine index keeps setting new records, as firms both reopen fully and expand. Companies are also using every means possible to find new employees as the number of unfilled positions also it at record highs.

IMPLICATIONS: I like to say that the answer to all economic questions is “It depends!” and that is the case with the current state of inflation. Consumer prices surged in July, but the rise was less than what we saw in the previous four months. So, does that mean inflation is fading? Well, it depends. If all you worried about was the period from March through June, then the answer is yes. If you look at it in an absolute sense, that is, was the rise in July high, the answer is no. So, pick you poison. My view is this: The last thing we want to see is additional months of price gains that are above 0.2%. To get back to the Fed’s average target of 2%, you need a monthly rise of less than 0.2%, so we are nowhere that happening, at least not yet. Actually, it would be nice to see that number once. Until that happens, I will not be exuberant about any “deceleration” in the monthly consumer cost numbers. In addition, the massive number of job openings points to further gains in wages, which should keep the pressure on prices. That said, these reports will not do anything to the Fed’s wait and see approach. The members are not so foolish as to think an annualized pace of 5.8%, which is what we would get if the July gain was repeated over the next year, is anything to be happy about. But they need more time to allow the wild swings that were created in 2020 because of the pandemic to be smoothed out. As long as the Fed holds off on warning that it is nearing the point that tapering will begin and subsequently rates will be increased, investors will likely remain optimistic.

Second Quarter Productivity and July Small Business Index

KEY DATA:  Productivity: +2.3%; Unit Labor Costs: +1%; Real Compensation: -4.8%/ NFIB: -2.8 points; Future Conditions: -8 points

IN A NUTSHELL: “Businesses continue to operate very efficiently, which should help keep earnings solid.”

WHAT IT MEANS: The economy soared in the second quarter and that was good news for nonfarm businesses.  The sharp 7.9% rise in output more than offset the 5.5% robust gain in hours worked and as a result, productivity increased at a solid pace.  The increase in efficiency also largely offset the surge in hourly compensation, so labor costs rose at a modest pace.  While businesses did well in the spring, things were quite as good for workers.  Yes, it was nice to see that hourly wages rose strong pace, but inflation soared even faster.  That led to a sharp decline in real, or inflation-adjusted compensation. 

Small businesses should be happy about the reopening of the economy, and they were for a while.  But conditions could be changing, at least a little.  The National Federation of Small Businesses’ optimism index decline in July.  There had been a nice bump up in June, but that disappeared and the level is similar to what we have seen for four of the last five months.  For the eight consecutive month, the outlook for business conditions was negative and it dropped sharply in July.  Earnings expectations are also negative, not a good sign for hiring or expansion.  The big problem remains costs, both labor and nonlabor.  Input expenses are rising sharply and actual compensation increases are exceeding expected ones.  The lack of qualified workers is also a major issue, with a record 49% of the respondents saying they could not fill positions.       

IMPLICATIONS: There is good news and bad news in today’s reports.  The sudden reopening of the economy has not caused business labor costs to rise significantly, as production gains outstripped rising labor costs.  When you add in inflation, compensation expenses are dropping at a rapid pace.  Thus, corporate earnings should be holding up.  But that also means workers’ spending power is beginning to falter.  That is not good news, especially for small businesses who are already concerned about the future.  Still, there are no signs that the economy is downshifting.  July’s job gains were massive and with so many more people working, it can only mean that total income is rising solidly.  The conundrum the Fed faces is that the current data do not support its massive liquidity program.  But uncertainties about the future argue for it to stay the course, at least for a while.  Once again, when facing a “do too much” vs. “do too little” choice, the Fed is likely to do too much.  It is easier to slow growth than accelerate it and with rates so low, it has a lot of arrows to fire at any inflation threat. 

June Job Openings and July Employment Trends

KEY DATA:  Openings: +590,000; Hires: +697,000/ ETI: +0.84 point

IN A NUTSHELL: “With openings exceeding unemployment, strong job gains look to be with us for a long time.”

WHAT IT MEANS:  The July job numbers were outstanding, and it is clear why that was the case:  Despite all the efforts that firms are putting into finding new workers, robust economic growth is causing employers to lose ground when it comes to filling job openings.  The rate of openings, which is openings divided by total employment, was by far and away the highest on record.  Indeed, there are more job openings than unemployed workers. Labor market conditions are beginning to look like what they were in the period of 2018 to early 2020, when the unemployment rate was near or at record lows.  However, the rate is now about two percentage points higher.  The willingness of workers to quit their jobs, which includes leaving a position or moving to another employer, is also as high as we have ever seen it.  In other words, while the unemployment rate may be well above what economists consider to be full employment, for employers, that situation has already effectively been reached.

Supporting the view that the labor market is extraordinarily tight was the July rise in the Conference Board’s Employment Trends Index.  The index has retraced all that it lost when the pandemic shut things down.  As the report note, “Despite the still-high unemployment rate, many employers are still having difficulty finding qualified workers.”     IMPLICATIONS:  As I noted in my discussion of the July employment data, the huge increases in hospitality and government payrolls are not likely to be sustained or even repeated. But few economists believe that the job gains that approached one million in June and July can be repeated.But keep in mind, payroll increases between 300,000 and 500,000 are viewed as massive, so even if the gains were cut in half, the report would be great.  With job openings exceeding unemployed workers, continued robust job gains and further increases in the labor force participation rate, as people are induced to get back out into the market, are likelyBut that also means that wage pressures could continue building for an extended period.  The solid increases in both consumption and inflation are likely to be sustained as well. Businesses that have pricing power will continue to use it, while those that don’t will likely try to find ways to raise prices, nonetheless.  That might be good news for investors, as it implies profits can be sustained.  And since the Fed is in no hurry to start easing back on its supply of liquidity to the system, fears of rate hikes are premature, at least for now.

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.