Strong headline job gains Strong headline job gains\images\insights\article\people-walking-city-small.jpg July 2 2021 July 2 2021

Strong headline job gains

But underlying metrics are mixed.

Published July 2 2021
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June’s nonfarm payrolls rose by a stronger-than-expected 850,000 jobs, the highest rate of job creation in 10 months, with an upward revision in May. But despite this strength, there are several pockets of concern, as the household survey lost 18,000 jobs, the unemployment rate climbed a tick to 5.9%, the participation rate was unchanged and hours worked declined. In addition, the construction industry lost jobs for the third consecutive month in June, and private payrolls lagged the gains in nonfarm hires due to the largest monthly surge in government hiring since last August.

Seasonality still a problem For the fifth consecutive month, the June nonfarm payroll report has understated the powerful rebound in the labor market we’ve enjoyed due to the aggressive fiscal and monetary policies orchestrated in Washington a year ago. On a non-seasonally adjusted basis, the labor market added 1.148 million jobs in June, but the Bureau of Labor Statistics (BLS) seasonally adjusted that number down by 298,000 jobs to its official gain of 850,000 jobs this morning, which was still well above the Bloomberg consensus of 720,000. Over the past five months, the BLS has seasonally adjusted job gains down by an average of 503,000 jobs each month. But July’s labor-market results are traditionally adjusted upward (by an average of 1.3 million jobs since 2000), so we expect to finally see significantly stronger numbers next month, to be reported Aug. 6.

Other issues holding back hiring Many lower-wage workers who are unvaccinated remain concerned about contracting Covid-19, and many have child-care or public-school issues with their younger children in states where those facilities are not yet fully reopened. They remain home rather than returning to their now-open jobs.

President Biden’s $1.9 trillion American Rescue Plan program signed into law in March extended the federal unemployment bonus of $300 per week to Sept. 6. That’s in addition to average weekly unemployment benefits from the states that average $318 per week (within a range of $275-387). That total $618 average weekly unemployment benefit in a 40-hour work week translates to $15.50 per hour. With a tax exemption for the first $10,200 in benefits, that raises the effective wage rate up to about $18-20 per hour. So, companies are bidding against these generous unemployment benefits to entice their employees to come back to work.

Consequently, 26 states are in the process of scaling back the $300 federal unemployment insurance bonus during mid-June to mid-July. We expect that nonfarm payrolls will improve sharply in July and then again in September, as these federal benefits fully expire for all states and as schools open.

Claims, ADP and JOLTS mixed Initial weekly jobless claims backed up mid-month, with the June survey week rising to 418,000 claims. But they got back on track for the week that ended on June 26, falling to 364,000 initial claims—a new 15-month low that’s 94% below the pandemic peak. Although ADP added a stronger-than-expected 692,000 private jobs in June, that represents a 22% sequential decline from downwardly revised May results. The Job Openings and Labor Turnover Survey (JOLTS) posted a much stronger-than-expected record high of 9.3 million job openings in April. The number of people who voluntarily quit their jobs surged to 4 million, with a record quits rate of 2.7%.

Headline labor gains solid Nonfarm payrolls rose by a stronger-than-expected 850,000 jobs in June (the highest rate of job creation in 10 months), compared with an expected consensus gain of 720,000. May was revised up by 24,000 jobs to a gain of 583,000. But private payrolls rose by only 662,000 jobs in June, which means that government hiring surged by 188,000 jobs last month (the fastest such pace in 10 months), led by education hiring at the local (gain of 124,000 jobs) and state (69,000) levels. Federal government hiring declined by 5,000 jobs last month.

Household survey falls Household employment lost 18,000 jobs in June, compared with robust gains of 444,000 workers in May, 328,000 in April and 609,000 in March. The civilian labor force rose by 151,000 persons in June, versus a decline of 53,000 workers in May, compared with strong gains of 430,000 jobs in April and 347,000 in March. Finally, the number of unemployed workers rose by 168,000—we believe that people who are out of work are now confident enough to start looking for jobs again. That compares with a decline of 496,000 people in May, an increase of 102,000 people in April and declines of 262,000 in March, 158,000 in February and 606,000 in January.

As a result, the unemployment rate (U-3) unexpectedly rose to 5.9% in June (consensus expectations at 5.6%) from a new post-pandemic low of 5.8% in May, although it is still down sharply from its peak in April 2020 at 14.8% (the single worst month for the labor market since record-keeping began in 1939). The labor impairment (or underemployment) rate (U-6), which is a better and broader barometer of the labor market that includes both part-time and discouraged workers, plunged to a new one-year low of 9.8% in June from 10.2% in May, well below its record high of 22.9% in April 2020. The spread between the U-3 and the U-6 has now narrowed from 4.9% in February to 3.9% in June. The labor force participation rate was unchanged at 61.6% in June but is still well above its trough of 60.2% in April 2020, a 47-year low.

Average hourly earnings rose by 3.6% on a year-over-year basis in June, up from 1.9% in May and 0.3% in April, while average hours worked moved down a tick for the second consecutive month to 34.7.

K-shaped recovery stalls The unemployment rate for those with a bachelor’s degree or higher backed up to 3.5% in June from 3.2% in May, still well below its 8.4% peak in April 2020. But the rate for individuals with less than a high school diploma surged to 10.2% in June from 9.1% in May, up sharply from 8.2% in March, although it remains below its peak at 21.2% in April 2020. Generous unemployment benefits and a record quits rate may be at work here.

Labor-market sectors mixed Leisure & hospitality continued to be a big winner in June, adding 343,000 jobs in June, compared with an upwardly revised gain of 306,000 jobs in May, 328,000 in April, 227,000 in March, and 413,000 in February. But construction lost jobs for the third consecutive month, dropping 7,000 workers in June, 22,000 jobs in May, and 9,000 jobs in April, compared with a robust gain of 93,000 jobs in March. Housing prices and commodity costs have surged this year, and skilled labor (plumbers, electricians and carpenters) in the housing market is tough to find.

Manufacturing added a disappointing 15,000 jobs in June (expected consensus gain was 25,000), May was revised up sharply to a gain of 39,000 (up from 23,000), although April lost 35,000 jobs. Education & health care added 59,000 in each of June and May, up from a tepid gain of 23,000 in April. Retail added a robust 67,000 workers in June, May was revised up sharply to a gain of 27,000 jobs (preliminary loss of 6,000), and April lost 22,000 jobs. Temporary help (an important labor-market leading indicator) added a strong 33,000 jobs in June, up from losses of 7,000 jobs in May, 122,000 in April and 6,000 in March.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

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