Friday, August 6, 2021
Investors finally got the strong pop in payrolls many have been calling for, breaking from the string of recent lukewarm jobs reports and weakening data from other segments of the economy that have been stoking peak growth fears. And, yet, while this is an unequivocally bullish jobs report, some questions remain.
The U.S. Bureau of Labor Statistics’ employment report revealed that the domestic economy added 943,000 jobs in July, beating Bloomberg-surveyed economists’ median forecast for a gain of 858,000. The prior two months also received strong net positive revisions of 119,000 jobs. Roughly two-thirds of the overall gain came from local government education and leisure and hospitality sectors, adding 220,700 and 380,000 respectively.
The unemployment rate fell to 5.4%, a big beat relative to expectations, and was paired with a slight uptick in the labor force participation rate, which moved to 61.7% from 61.6%. Getting that number back closer to the 63.4% pre-pandemic level is going to be key in making a full labor market recovery. And with the job openings rate at historic highs, the issue appears to be more with getting labor supply back online than with a lack of available jobs.
“This number was really good, but the best part was it wasn’t so strong that the Federal Reserve (Fed) would have to change policy,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In that sense, it was not too hot and not too cold.”
As seen in the LPL Chart of the Day, we remain 5.7 million payrolls shy of February 2020’s peak.
In the meantime, the more interesting debate may be what to make of wages, which rose 0.4% month over month compared to expectations for a 0.3% increase. Early on in the pandemic, in-person service sector jobs, which tend to be lower paying, were hit hardest. As lower paying jobs fell off, average hourly earnings logically rose. The expectation, therefore, was that when these jobs returned average hourly earnings would then face downward pressure. That has not played out exactly as the market thought, though, largely because the supply of labor has not fully returned and employers are being forced to pay up to attract workers that are willing to come back to work. Wages have important implications in the inflation debate, as they and rents are considered to be among the “stickier” components of inflation. It remains to be seen whether a potential large increase in the labor supply in coming months will be able to reverse the increasing wage dynamic.
The Delta variant and the potential for a reversal of reopening trends are wildcards in the labor market story. Ability to work is one thing, willingness to work is another. A pickup in the more dangerous Delta variant is denting confidence among those still skittish about COVID-19, and may blunt some of the expected “breaking of the dam” in labor supply come September, when schools and childcare facilities should be fully reopened and supplemental unemployment benefits will be eliminated nationwide. Furthermore, the observation window for today’s report closed before the Delta variant emerged in a major way, and therefore did not fully capture its effects. Any judgements on that front will have to be put on hold until next month’s report, which may temper the market reaction somewhat to these positive numbers. Still, we remain optimistic that the Delta variant will prove to be a temporary drag on the recovery based on vaccinations and containment measures.
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