Jobs surge in July
KPMG Chief Economist Constance Hunter & Barry Ritholtz of Ritholtz Wealth Management discuss some of the key takeaways and how the Delta variant could impact future reports.
I'm here at Leen’s Lodge at Camp Kotok for our annual fishing retreat, and today for our jobs take we're going to get a few words from Barry Ritholtz of Ritholtz Wealth Management. Barry, we got a strong number today. What's your immediate takeaway?
You know there's been so much volatility around this number. It's a noisy daily data series to begin with. So, I always try and take this with a grain of salt. I'm very happy with a number, with a nine handle non-fun payroll. Tells us the economy is continuing to strengthen and reopen. The big question is going to be now, how much the delta variant affects the next couple of months? So, that's the problem with these data points. There's always something else coming at you right afterwards.
Yeah, and I think this is the big question. How much of a pullback do we get with delta and how much does this affect the underlying strength of the economy or will delta just be a blip that we manage through on our trajectory of a strong recovery.
July jobs report stuns, but uncertainty looms
The July employment report was much stronger-than-expected, with 943k jobs created versus the 870k consensus number prior to the report, lowering the unemployment rate to 5.4%. Much of the unanticipated strength was in public sector employment — likely related to some seasonal and pandemic-related factors in the education sector.1 Private sector employment also posted a strong showing (703k vs. 709k consensus), and as expected, hiring in the leisure and hospitality sector was again robust, posting a year-over-year increase of 9.6%. Additionally, the number of long-term unemployed fell by 560,000k, another good sign that the economy is on strong footing.
Wages are up
Employers are increasing wages to entice workers to return and concerns over the lack of available labor are likely to become exacerbated by the rise of the Delta variant. Wages grew 4.0% year over year in July, with the leisure/hospitality and transportation/warehousing sectors posting the highest month-over-month wage gains (0.9%). Early in the pandemic, we counterintuitively saw the average wage rate increase as low wage workers fell out of the topline number -- a similar dynamic played out in the Global Financial Crisis (GFC). However, unlike the GFC, growth in Average Hourly Earnings has been strong as the economy has come back online, likely due to the increased wage demand of workers in the service sector.
Optimism with some caveats
This report left many reasons to feel optimistic about the continued strengthening of the U.S. economy, but should also be understood in the context of three important factors:
- There are still 1.5 million people who want a job but are not in the labor force as compared to the pre-pandemic era.
- The survey period for the report was the week of July 12th, when the Delta variant was only beginning to emerge and average daily cases in the U.S. were just over 22,000 vs. over 100,000 today. Although we have not yet changed our forecast due to the rising infection rate, the Delta variant remains the biggest risk to the economic outlook and could impact the August and September employment reports.
- While many states that ended their supplemental unemployment insurance early, they did so after the June survey week– which means the effects were felt in today’s July report. We do not see this as the predominant reason for workers not returning to work in some sectors – other factors such as childcare and concerns around rising infection rates likely play a more significant role – the anticipated September end to the federal program will probably boost hiring in August and September somewhat.
The virus continues to dictate the recovery
The economy continues to expand at a robust pace and conditions in the labor market are very strong, but the rise of the Delta variant is a significant risk to the forecast and could weigh on the late summer and fall employment reports, especially if new restrictions are instituted in parts of the country.