Friday, July 2, 2021
Nonfarm payrolls rebounded in a big way in June, following relatively disappointing numbers the prior two months.
The U.S. Bureau of Labor Statistics’ June employment report revealed that the domestic economy added 850,000 jobs for the month, beating Bloomberg-surveyed economists’ median forecast for a gain of 720,000. The prior two months also received relatively small net positive revisions of 15,000 jobs. In a vacuum, we view this number as unequivocally positive, but we continue to believe that this economy has the potential for a string of monthly gains in excess of 1 million.
The bears, though, also have elements of this report they can emphasize. The unemployment rate actually rose 0.1% for the month to 5.9%, which came against expectations for a 0.2% decline. Perhaps more worrisome, the labor force participation rate refused to budge at 61.6%, and remains well below the January 2020 level of 63.4%. The early market reaction to the numbers indicates that investors believe there are enough mixed signals here for the Federal Reserve (Fed) to remain on hold and not move up its timeline for tapering asset purchases. “Substantial further progress” on the employment front still needs to be made.
Investors also looked to this jobs report for clues about inflation, the other half of the Fed’s dual mandate.
“The sustainability of bargaining power for relatively lower wage service sector workers who return to the labor force is going to be an important tell on the inflation debate,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Wage increases can lead to stickier inflation, and at the moment some employers have no choice but to pay up in order to meet surging demand. Whether this dynamic holds past summer and into the fall, though, remains to be seen.”
As seen in the LPL Chart of the Day, after June’s 343,000 gain, the leisure and hospitality sector still has a long way to go to get back to pre-pandemic levels in payrolls. In fact, the sector continues to represent the largest share of the 6.8 million lost jobs in the overall economy since February 2020. The pace of return for these service sector jobs, and at what cost to employers, will be key macro inputs for our outlook.
With wage costs in focus, June saw overall average hourly earnings rise 0.3% month over month. This came on the heels of much hotter readings the prior two months. The key difference, though, is that the prior two months had significantly weaker jobs numbers, and importantly the bulk of jobs yet to be regained tend to be clustered in lower paying industries. As a result, a unique feature of this recovery (one would expect) is that as more jobs are recouped, overall average hourly earnings should receive downward pressure. That the overall number is remaining somewhat elevated against the backdrop of rapidly increasing lower paying job creation has some worried. We will get a more vivid picture of the wage landscape on July 30, when we receive the quarterly Employment Cost Index. This report is mix-adjusted, meaning it accounts for the fact that some industries have been more affected than others by the pandemic, and should give a more granular look into industry-specific wage pressures.
We continue to believe, though, that the forces that are creating labor market bottlenecks, and thus forcing wages higher, will largely self-correct over the course of the second half, and inflation will remain reasonably contained. A stubbornly low participation rate can be blamed on several factors. The most hotly debated is the issue of supplementary unemployment benefits, which are set to expire in early September. To the extent that their existence may be creating significant distortions in the labor market, the September report should be the start of a reversal in this effect. The return of childcare facilities and schools, as well as increasing comfort reengaging in normal activities should play their parts to boost employment as well, especially in the in-person service sector industries.
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