Economy added 850,000 jobs in June

KPMG Chief Economist Constance Hunter says overall the report points to encouraging signs for the future.

Constance L  Hunter

Constance L Hunter

Former Principal and Chief Economist, KPMG LLP

Video transcript

The economy added 850, 000 jobs and this is a steady improvement over the past two months. But more importantly what it shows about the future is very encouraging. The percentage of workers that are working at home due to the pandemic fell to 14.4 percent. Now that's from a high of 35 percent last year and what this suggests is that central business districts will slowly come back to life. We expect that to be an accelerated pace once we hit September and people are back in school full time. So, this suggests positive news for central business district real estate and for all of the leisure and hospitality and retail businesses that support central business districts. Furthermore, we got a strong increase in leisure and hospitality employment showing that people are going back to these activities as the economy continues to open up and more people are vaccinated. Finally, we got some very interesting information about wages. Now it is important to note that year over year data is distorted by the pandemic. So, we look at levels and we look at the difference between those people who can work from home and those people who can work from their job site and we know for people that can work from home, there's a much lower unemployment rate, almost two and a half percent and so there is more consistent wage pressure among this segment of the labor force and we expect that to remain until the end of the coming expansion should be about five years. Conversely, for people who have to work from their job site we have a higher unemployment rate and lumpier but higher wages. This is the segment where we hear anecdotes of thousand dollar bonuses and increases to get people back to work. This is the segment of the population that is least likely to have received at least one vaccine and also the segment of the population that is likely to be facing the most challenges around childcare.

Has the labor market turned a corner?

Total U.S. employment jumped 850,000 in June, well above the 720,000 that most economists had expected. The recovery of the services sector continued to strengthen last month with leisure and hospitality adding a whopping 343kand retail adding 67k as retail re-opens and people emerge from lockdown. Government also added a robust 188k job, driven primarily by public education employment. Over the previous five months, leisure and hospitality employment has been the star, rising by 1.6 million as restaurants, entertainment venues, and hotels reopened, and pandemic constraints eased.

Vaccination rates amongst the working age population (18-64) neared 50% by mid-June with workers returning to offices and the share of workers teleworking due to the pandemic fell to 14.4%, down substantially from the pandemic highs of 35.4%.

Despite the nearly million jobs gained this month, the unemployment rate ticked up slightly to 5.9%. This is typically a sign of workers joining the labor force but surprisingly, the labor force participation rate remained steady at 61.6%. The disconnect in the data could signal a possible revision next month.

Roadblocks remain as the economy transitions towards a post-pandemic norm:

Millions of workers remain sidelined and employers continue to report challenges in incentivizing workers to return to their jobs. While labor force participation rose slightly in June, it still remains well below the pre-pandemic rates of 63.4%. Many commentators have blamed the subdued return to work on generous federal unemployment insurance supplements, leading 25 states to end pandemic assistance, though it remains to be seen whether shortening benefits will bring back workers. Other factors are likely playing into the tepid return to work including greater childcare responsibilities, fears of contracting COVID-19, and a skills mismatch created by a rebalancing of the post-pandemic economy.

Average hourly wages rose 3.6% year over year as employers attempt to incentivize workers to return to their jobs and pandemic barriers to economic activity are lifted. Leisure and hospitality experienced the largest wage increase of 7.1% year over year as employers boosted compensation to incentivize workers to return. Survey data from the NY Fed suggests that workers have raised their reservation wage by as much as 16%, with particularly large increases amongst low wage workers.

Our view:

We view the numbers as positive, the number of people working from home has decreased which is good for retail and food establishments in central business districts. Net net - we expect to see continued progress in the labor market over the next 6 months as workers return to their offices and people concerns about the pandemic impact abate.