Labor Day blues
The August jobs report is a huge miss.
August’s nonfarm payrolls rose by a much weaker-than-expected 235,000 jobs, the smallest gain in seven months. That was slightly offset by a combined positive revision of 134,000 jobs in June and July. But the Bloomberg consensus was expecting a robust gain of 733,000 jobs, meaning a miss of nearly a half-million jobs. Our forecast here at Federated Hermes was for a much lower gain of only 490,000.
Wages soared in August by 0.6% month-over-month, which puts their annualized gain at 6.24% over the past five months. That collectively points to labor-market stagflation, as poor job creation last month slowed while sustainable wage inflation has surged, a troubling combination that harkens back to the painful memories of the Carter administration in the late 1970s.
Leisure & hospitality hiring fell off a cliff in August, posting no gain, compared with a robust monthly average increase of 337,000 jobs over the previous five months. Further, retail hiring was negative in each of the past two months and construction and temporary hiring both lost jobs in August.
But the labor-market news is not all bad. The household survey added a solid 509,000 jobs in August on the heels of a powerful gain of 1.043 million jobs in July. That helped to push the unemployment rate (U-3) down to a cycle low of 5.2% and the labor impairment rate (U-6) to 8.8%. Also, the manufacturing sector continued its strong recovery, posting a gain of 37,000 jobs last month after adding 52,000 and 32,000 jobs, respectively, in July and June.
What went wrong? August is historically a quirky month, with vacations, back-to-school trends and manufacturing furloughs due to factory retooling, all throwing variability into the data. But there are three specific issues that appeared to negatively impact the report:
- Delta variant President Biden blamed the Covid-19 delta variant as the reason for the huge August miss. But this may be more of a timing issue, as the surge in infections appears to have already peaked in more than one-third of the states. Will that trend continue in those states, and might other states improve in coming weeks?
- Weekly Federal unemployment bonus This extra payment of $300 expires Sept. 6 in the 24 states that had not ended it earlier in the summer. Many lower-wage workers who are unvaccinated and concerned about contracting Covid-19 or have child-care or public-school issues with younger children opted to remain home in August rather than returning to their now-open jobs. That contributed to the weak hiring trends in leisure & hospitality, retail and temp help. Also, companies are bidding against generous unemployment benefits to entice their employees to come back to work, which has spiked wage inflation since March. So, the labor market could improve sharply starting in September when these federal benefits fully expire for all states and as schools re-open.
- Seasonality still a problem For the sixth time in the last seven months, the Bureau of Labor Statistics (BLS) revised the nonfarm payroll report down. This August by 77,000 jobs, from a nominal gain of 312,000 jobs to a seasonally revised gain this morning of 235,000 jobs. Historically in September, October and November, the BLS has revised nominal job gains down by a monthly average of 473,000 since 2000.
JOLTS strong, claims solid but ADP weak The Job Openings and Labor Turnover Survey (JOLTS) posted a much stronger-than-expected record high of 10.1 million job openings in June, and the number of people who voluntarily quit their jobs rose to 3.9 million, with a record quits rate of 2.7%. Initial weekly jobless claims fell to a new pandemic low of 340,000 claims last week, 94% below the pandemic peak. ADP, however, added a much weaker-than-expected 374,000 private jobs in August, 40% below the consensus gain of 625,000 jobs that had been expected.
Despite the solid trend in claims, August’s weak ADP report and a poor Philadelphia Federal Reserve report for August (a 19.4 actual reading versus the expected consensus increase at 23.1) contributed to Federated Hermes’ well-below consensus nonfarm payroll forecast of only 490,000 for August. When we factor in the negative seasonal adjustment of 77,000 jobs and the positive revisions of 24,000 in June and 110,000 in July, the flash nonfarm payroll gain of 235,000 jobs is adjusted to a gain of 446,000—a stone’s throw from our forecast of 490,000.
What’s next for the Fed? Today’s miss is precisely why we expect the Fed to wait until its FOMC meeting on Nov. 2-3 before announcing the beginning of its quantitative easing tapering program. In our view, the Fed wants to see if the labor market rebounds in September after August’s disappointing miss. The September jobs report will be flashed on Friday, Oct. 8.