The market’s eyes are firmly glued to August’s jobs report set to come out September 3rd. After Jerome Powell’s speech at the Jackson Hole Economic Symposium indicated the Fed’s preference for a data determined tapering, investors have been intently watching economic indicators for clues to the market’s future. Undoubtedly August’s jobs report will be one of the biggest indicators given its lagging snapshot of Covid’s impact. More importantly, this report will be the last outlook on employment before the Federal Reserve’s policy determining meetings on September 21st and 22nd.
For a population expecting the pandemic to be over, the Delta Variant surge has shaken consumer confidence in more ways than one. Overall, economic data shows weakening; the consumer sentiment index in particular fell to a ten year low this August with inflation increasing, wage growth slowing, and unemployment declining less than expected. This has effected predictions for Q3 economic growth with analysts factoring in the impact of hurricane Ida and other crises despite the above-average rate of growth so far.
Recent economic reports have also captured slowing job creation – hitting the still recovering service sector hard. Spending on services such as dining and travel have likely declined in August which will add to the sector’s already substantial pain. But the decline is expected to be temporary as the Delta Variant appears to have already reached its peak in hot spot states like Florida and Louisiana. Job growth amongst lower-wage roles has likely slowed since the initial reopening surge while growth has probably continued in the manufacturing sector workforce with companies battling supply chain bottlenecks.
Similarly, July’s retail sales declined much more than the expected .3% – likely fueled by the reversal in consumer behavior as more people spend on services rather than goods. This resulted in a 1.1% decrease from June levels based on Census reports. The corporate sector has also fallen under supply chain pressures which are contributing to the overall aggravation of labor market issues.
On a positive note, recent data for initial jobless claims were 5 thousand less than estimated based on data for the last week of August. Reaching only 340 thousand, the number is the lowest since March 2020 and is a bullish sign for the slowly recovering labor market. On the other hand, private payrolls increased by only 374,000 – almost half of what was predicted. However, private payrolls have typically differed from the non-farm payroll results.
Adding to these difficulties is the still increasing rate of inflation which companies are confident can be passed on to consumers through higher costs for durable goods. Offsetting this slightly is national growth in private income; largely caused by growing competition for workers which has generally forced wages to a higher level. How this will affect businesses long term has yet to be seen; but based on the Jackson Hole Symposium, inflationary pressures are expected to continue unless inflation spreads more broadly across sectors.
The Federal Reserve
Despite the vocal objections of St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan, the Fed’s quantitative easing program – which purchases $120 billion government-issued and government-backed securities per month – will likely continue. Although the Federal Reserve is looking to “dial back” easy money policies and asset purchases, labor market concerns inspire caution. The jobs report is expected to miss the 1 million jobs per month benchmark and the Fed is expected to continue waiting for “substantial further progress” as it eyes Delta Variant concerns.
This puts the pressure squarely on August’s jobs report with the central bank’s Federal Open Market Committee’s 18 policymakers using its data as a more comprehensive indication of the Delta Variant’s impact on economic activity following its accelerated spread this summer. A poor jobs report will likely override the Fed’s awareness of considerable market demand – as indicated by signs of inflation – and force the Fed to delay its bond tapering program. While this would rally the market, investors could also read a poor jobs report as a bearish sign of the Delta Variant’s, perhaps, long-term impact.
In light of this, we are expecting a decline from July’s 943 thousand payroll increase. The outlook for job growth in the US inspires a relatively optimistic estimate of 800 thousand new jobs for the month of August. But we would expect the market to rally based on this shortfall which would further delay tapering.
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