5.9k Share this
On the surface, the headline payroll report (+850K) looked solid. Beneath the hood is a different story.
The state Continuing Unemployment Claims data (CCs) appear to be overwhelming in their indictment of the current federal supplemental $300/week unemployment benefit. It clearly is an impediment to filling vacant jobs.
Excess liquidity continues to grow. The Fed needs to “taper” sooner rather than later.
Retail Sales for June likely tanked as auto sales fell -10% M/M. Financial markets still appear to have much stronger economic growth priced in than what will end up being reality.
While the media hypes stories of rising wages and sign-on bonuses, the aggregate data don’t support this view.
The latest CBO deficit projection and economic forecast points to a GDP still not at 2019 levels.
Labor: The Monthly Unemployment Reports
The apparent good news from the Friday (July 2) Unemployment Report (job growth +850K) (the Payroll/Establishment Survey) ended with the headline. Nearly 50% of the job gains were in the low wage Leisure/Hospitality (L/H) and Retail sectors, with government hiring (reopening of schools this fall) contributing another 32%.
The workweek declined again in June (-0.3% – now two months in a row). “Shortages,” I’m told time and again. In the manufacturing space, where shortages are impacting production, the workweek declined -0.5% M/M and overtime hours contracted -3.0%. Last I looked, manufacturing made up much less than 20% of economic activity in the U.S. Doing the math, the declines there account for much less than one-third of the total. The logical conclusion here is that, outside of the reopened L/H and Retail sectors, perhaps the demand for labor isn’t so “hot.”
MORE FOR YOU
A convincing argument regarding labor shortages would need confirmation from the sister Household Employment Survey. This is the survey that produces the U3 and U6 Unemployment Rates. The data from that survey are anything but “confirming.” Jobs in June declined -18K. Of course, because it doesn’t fit the narrative of a “hot” economy, the financial media basically ignored these results. The U3 rate rose to 5.9% from 5.8%. You can see that this didn’t fit the narrative as the consensus expectation for U3 was 5.6% – a big, big miss.
The U6 Unemployment Rate (includes those working part-time, want full-time, but can’t find it) fell from 10.2% to 9.8%. While this is “positive” news, no one should get bubbly, as we are still far away from the 6.8% level posted in December 2019, just prior to the pandemic. That 9.8% is still a recessionary reading.
Labor: The Weekly Data
The weekly data continue to show that the employment recovery is agonizingly slow. When combined, the state and PUA (special Pandemic Unemployment Assistance programs) Initial Unemployment Claims (ICs) showed a fall of -28K to 474K (from 502K) the week of June 26. ICs are a proxy for new layoffs. Some progress here, for sure. But this is still miles away from the 200K pre-pandemic “normal.” One has to ask: “If the employment market is so hot, why are we still at 474K new layoffs/week?” This is still deeply recessionary!
Of greater concern is the Continuing Unemployment Claims (CCs) data, sitting at 14.7 million in the latest data report (week of June 12). Normal here is 2.0 million. It should be noted that this CC data survey occurred the same week of the BLS’s Payroll and Household Surveys. And like the data from those surveys, the chart at the top of this blog shows the very shallow downslope for CCs. We do expect that the downslope will get much steeper as summer passes because near summer’s end we will get the complete withdrawal of the federal $300/week unemployment supplement payment. The table shows the percentage changes in state CCs from May 15 to June 19 sorted by the end date of the supplement.
Note the huge differences in the reduction in unemployment in the states that opted out of the supplement payment and those 27 that stayed in. For the “opt out” states combined, the unemployment reduction over the May 15 to June 19 time period was -19.4%, while it was a meager -3.9% for the opt-in states. This data makes it crystal clear that the federal policy, while born of good intentions, has been disruptive to the economic recovery.
Other Data and Musings
· Bond market yields fell on the employment news as the underlying data showed labor markets that are softer than what financial markets had expected (and priced in). In addition, we continue to follow the massive liquidity in the Reverse Repo market, nearly $1 trillion at quarter’s end (a regulatory reporting date for banks – so a lot of “window dressing!”)
This chart can be viewed as a proxy for “excess liquidity.” Note its rapid rise in Q2, surely a signal to the Fed that its QE (Quantitative Easing) process should be ended. There are two things to note here:
- “Taper” means a slowing, not a cessation, so even as the market’s dreaded “taper” begins, liquidity will continue to be added – just less rapidly;
- With this much liquidity awash in the economy (mainly in the banks) and little prospect for a reversal anytime soon (QT – Quantitative Tightening where the Fed actually shrinks its balance sheet and removes liquidity), it would appear that there is little prospect of interest rates rising. (Markets have also adopted the view that the “inflation” we have is mainly “transitory” – the subject of another blog – another reason interest rates will be “lower for longer.)
· In our last couple of blog posts, we mentioned that sentiment surveys had indicated that auto buying intentions were at a 39-year low. Those intentions translated into a -10% M/M fall in June U.S. auto sales (from 17.0 million (annual rate) in May to 15.4 million). The consensus estimate was 16.5 million; yet another significant miss, indicating that markets are still too bullish. This likely will translate into a healthy fall in June Retail Sales (perhaps -2.0% or more). May’s damage was -1.4%. Hot economy! Really?
· Wages: We refer again to the Atlanta Fed’s Wage Tracker, likely the most comprehensive analysis of wage trends. Wage growth slowed from +3.4% Y/Y in March to +3.0% in May, the weakest posting since early 2018. The slowdown is true across every sub-index, including ethnicity, gender, education… Despite what surveys say or how the financial headlines read, there is little evidence of wage inflation! (Yet another indicator of yields remaining “lower for longer.”)
· The CBO just projected a $3 trillion fiscal deficit for this fiscal year with a 6.7% 2021 GDP growth forecast. The math says, excluding the government, the private sector’s GDP is flat to 2019 levels, if not still a bit below. (Need I say it again? “lower for longer?”)
The labor market is still producing “recessionary” results. And it is crystal clear that the federal unemployment supplement is an obstacle to a return to “normal.” But it does appear that labor markets will “normalize” post-September 6.
With liquidity at record levels and rising, “tapering” just under “discussion” at the Fed., slowing Auto sales implying weakening Retail Sales, little real evidence of wage inflation, the growing realization that the “inflation” we are seeing is “transitory,” and new economic projections showing a slower recovery than what looks to be priced into financial markets, there is one obvious conclusion: interest rates will remain low! There are also implications here for equity markets.
(Joshua Barone contributed to this blog)