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Markets, Economy

Economic Update: Labor Market Recovery

9/13/21 8:00 AM

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The latest monthly job report from the U.S. Labor Department was recently released and it confirmed that the pandemic remains the greatest obstacle in the way of a full labor market recovery.

Specifically, hiring slowed sharply in August, as employers added “just” 235K new payrolls following an upwardly-revised 1.05 million jobs added in July. The main driver of the slowdown was a resurgence in COVID concerns leading to the unwelcome return of mask mandates and other activity restrictions in several regions of the country.

 

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The good news is that the hiring weakness appears to be largely concentrated in high-contact, close-proximity services industries. Employment in the leisure & hospitality sector, for instance, was unchanged in August after adding over 300K payrolls for four months straight. Further, total employment at food services & drinking places declined by 41.5K payrolls in August, and healthcare payrolls contracted slightly as many elective procedures were put on hold. In industries where it is easier to social distance, on the other hand, hiring held up rather well in August. For example, manufacturing employment posted another month of solid growth, and the number of workers teleworking rose for the first time since December. Although this encouragingly means the labor market recovery should be able to get on a stronger footing once the pandemic is successfully dealt with, there are still other challenges to overcome.

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The net share of industries adding jobs in August, for instance, was the lowest since February. On the bright side this does not seem to be a demand issue, as evidenced by record high job openings at small businesses and the number of announced job cuts last month falling to the lowest level since 1997. The layoffs datapoint comes from Challenger, Gray & Christmas, which in the August report observed that “Companies are much more concerned about their talent getting poached than with finding ways to cut staff. They are in full retention mode.” The researchers even went as far as to warn that “The ongoing downturn in supply of labor may very well speed up the adoption of robotics for many companies. While care-related positions are not likely to be replaced, any process that is repeatable, routine, and programmable could be automated, and would help alleviate the shortage of talent.” This is far from an unheard-of proclamation but it is one that we could increasingly hear in the future should the supply issues in the labor market not improve.

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In the near-term some help for employers will come as the federal unemployment benefit boost finally expires this month, although due to excess savings pulling new workers off the sideline will likely prove to be a more gradual process. An additional challenge would occur if the variant-related uptick in COVID cases worsens and children are no longer able to stay in the classroom this fall, which could in turn keep the parents who depend on this daycare service on the labor market sideline even longer. Such an outcome would probably also cause the Federal Reserve to delay any tapering plans, but for now that is not our base case. In the meantime the only immediate way most employers can respond to the ongoing labor shortage is to boost worker compensation, and the net percent of small businesses in the latest NFIB survey that reported raising worker compensation over the last 3 months hit a record high. Without an accompanying increase in productivity such conditions can eventually lead to an increase in selling prices, which highlights why how quickly the labor supply logjams are resolved is a key factor in determining just how transitory 2021’s “hot” inflation readings will be.

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What To Watch This Week:

Monday

  • Nothing significant

Tuesday

  • NFIB Small Business Optimism Index 6:00 AM ET
  • CPI 8:30 AM ET

Wednesday

  • 3-Yr Note Settlement
  • 10-Yr Note Settlement
  • 30-Yr Bond Settlement
  • MBA Mortgage Applications 7:00 AM ET
  • Empire State Manufacturing Index 8:30 AM ET
  • Import and Export Prices 8:30 AM ET
  • Industrial Production 9:15 AM ET
  • Atlanta Fed Business Inflation Expectations 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET

Thursday

  • Jobless Claims 8:30 AM ET
  • Philadelphia Fed Manufacturing Index 8:30 AM ET
  • Retail Sales 8:30 AM ET
  • Business Inventories 10:00 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • 10-Yr TIPS Announcement 11:00 AM ET
  • 20-Yr Bond Announcement 11:00 AM ET

Friday

  • Quadruple Witching
  • Consumer Sentiment 10:00 AM ET
  • Baker Hughes Rig Count 1:00 PM ET

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