• US non-farm payrolls grew 235,000 in August
• Unemployment rate fell 0.2 percentage points from July, to 5.2%
• Wage growth increased 0.6% mom, 4.3% yoy
• Labor force participation remained unchanged at 61.7%
• Hiring slows sharply amid delta, complicating Fed taper

Strong hiring momentum slowed precipitously in August, as nonfarm payrolls rose by 235,000 jobs, well short of market expectations of 750,000. August’s total - the worst since January - comes with heightened fears of the pandemic and the impact that rising Covid cases could have on what has been a mostly robust recovery. As of August, nonfarm payroll employment was down by 5.3 million, or 3.5% from its pre-pandemic (February 2020) level. Meanwhile, the change in total nonfarm payroll employment for June was revised up by 24,000, from +938,000 to +962,000, and the change for July was revised up by 110,000, from +943,000 to +1,053,000. With these revisions, employment in June and July combined is 134,000 higher than previously reported.

Leisure and hospitality jobs, which had been the primary driver of overall gains at 350,000 per month for the past six months, stalled in August as the unemployment rate in the industry ticked higher to 9.1%. Instead, professional and business services led with 74,000 new positions. Losers for the month were retail, which lost 29,000, with the bulk coming from food and beverage stores, which saw a decrease of 23,000 and healthcare and social assistance (-6,000). Other gainers included transportation and warehousing (53,000), private education (40,000) and manufacturing and other services, which each posted gain of 37,000. Atypical seasonal patterns in education hiring due to pandemic-related school closures and re-openings make interpretation of local government results challenging. As with state government education payrolls (-20k), local government education pulled back (-6k versus +225k in July) while private education (+40k) was up strongly again. What is important is that all sectors remain well below their pre-pandemic levels.

The unemployment rate, meanwhile, dropped again to 5.2% from 5.4% and touched a new pandemic low. The drop in the unemployment rate was helped by the continued stagnation in labor force participation, which remained unchanged in August at 61.7%. Average hourly earnings rose 0.6% mom.

The unemployment rate declined by 0.2 percentage point to 5.2% in August. The number of unemployed persons edged down to 8.4 million, following a large decrease in July. Both measures are down considerably from their highs at the end of the February-April 2020 recession. However, they remain above their levels prior to the COVID-19 pandemic (3.5% and 5.7 million, respectively, in February 2020). Leisure and hospitality jobs, which had been the primary driver for the past six months, stalled in August. The month saw an increase of about 400,000 in those who said they couldn’t work for pandemic-related reasons, pushing the total up to 5.6 million. The labor force participation rate was unchanged at 61.7%, still well below the 63.3% in February 2020, the month before the pandemic declaration. Employment also remained well below pre-Covid levels, with 5.6 million fewer workers holding jobs and the total workforce still smaller by 2.9 million. Another key Fed metric, the employment-to-population gauge, stood at 58.5%, up one-tenth of a percentage point from July but still well below the 61.1% pre-pandemic level. The measure looks at total jobholders against the working-age population. A broader measure of unemployment (U6) that includes discouraged workers and those holding part-time jobs for economic reasons fell sharply, dropping to 8.9% in August from 9.6% in July.

Hourly pay jumped 17 cents or 0.6% mom to $30.73 an hour in August. Over the past 12 months wages have risen 4.3% yoy from 4.1% and are trending well above pre-pandemic norms.

Hiring slows sharply amid delta, complicating Fed taper

The jobs report for August was a major miss at a critical time. America’s labor market recovery slowed in August as the pace of hiring dropped to levels last seen in January (+233k). The pace likely reflects the uncertainty presented by the spread of the Delta variant and constraints on labor availability. The risks in the coming months are firmly to the downside due to the ongoing spread of the virus. As the Delta variant continues to circulate it is likely to lead to some consumer caution in areas where infections are rising strongly. This in turn could weigh on hiring in high-contact sectors in the near term. However, as the Delta variant impact fades with time, we expect the unemployment rate to continue to fall as more pandemic-related constraints on work ease and activity normalizes.

That said, we do not see this as a sign that the job market is in trouble. Like so many things in this pandemic era, this is a supply problem not a demand problem. The NFIB small business survey showed the share of businesses reporting that jobs are hard to fill rose to its highest on record in August. Employers are more than eager to hire, but a variety of factors are keeping would-be workers out of the market. The labor force participation rate did not budge from a still-low 61.7%. It is increasingly a sellers’ market for labor as evidenced by the rising costs for employees: average hourly earnings rose 0.6% in August, which was more than twice the expected monthly gain and lifted the year-over-year rate to 4.3%. Any number of factors could be keeping would-be workers out of the market, from COVID fears and lack of child care to the idea that extended jobless benefits diminish the urgency to find work. Most of these impediments could be removed or diminished by higher pay. For now, the lacklustre increase of just 235K makes it very unlikely that the FOMC will announce a taper of its asset purchases at its September 21-22 meeting.

Source: BIMB Securities Research - 6 Sept 2021