US: A Big Step Down the Road of “Substantial Further Progress”

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Summary

Employers added 943K jobs in July and employment was revised higher over the previous two months. The recent acceleration heightens the debate over when the labor market will meet the FOMC’s criteria for “great further progress.” While there have been some indications that labor limits have continued to soften, the growth of the Delta variant is obscuring the outlook. Fed officials are likely to like July’s progress, but we ultimately think they’ll want to see further land reclaimed and if restrictions be reduced to short-term frictions or longer-term damage before a decline begins.

Raising the Heat on Employment

The July jobs report is likely to heighten the debate over whether the labor market will meet or soon meet the FOMC’s criteria for “great further progress.” Employers added 943K new jobs in July, and employment in May and June was revised from a combined 119K. The rate of labor growth over the past three months has reached 832K, the highest since October last year, showing a considerable surge (see chart).

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Some strength has been driven by seasonal factors that have increased government employment by a strong 240K, as lower employment in the past year has led to fewer summer layoffs than usual. The edition noted, “Staff flights in education due to the pandemic distorted the normal seasonal accumulations and layoffs, likely contributing to the labor gains in July.” But private payrolls still advanced a solid 703K last month in addition to a significant upward revision to the June figure (now + 769K). Every major sector except retail added jobs, with the leisure and hospitality section (+ 380K) accounting for more than half of the private sector jobs last month.

The solid gain in leisure and hospitality employment shows that limits on labor supply continue to slowly soften as workers return to the difficult sector. The workforce increased by 261K in July, which led the participation rate slightly more to 61.7% (see chart). But participation still remains within its post-pandemic territory, emphasizing that the availability of workers remains a challenge. Fear of catching COVID because the Delta variant has spread across the United States is likely to remain a hindrance to the return to work, as well as child care responsibilities and possibly enhanced unemployment benefits. Retirements among older workers are another challenge. With the workforce growing only moderately, the sharp fall in unemployment to 5.4% from 5.9% in June was linked largely to the + 1-million increase in jobs measured by the domestic survey filled by the ranks of the previously unemployed.

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Supply Limits Continue to Offer Wages

In further evidence that inflation is widening beyond physical inputs and transportation costs, average hourly earnings (AHE) rose 0.4% in July, bringing the three-month annual rate to 5.0% (see chart). Wage earnings continue to be sharpest in the sectors where job losses remain the steepest, such as leisure and hospitality, where wages have been growing 7.6% just since the start of the year. Limits on job supply continue to offer wages as employers find it increasingly difficult to find the help they need.

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Ongoing supply challenges will keep up pressure on wage growth. Wages and salaries should offset some of the success to personal income due to declining fiscal support over the next two months, and this increased financial incentive from higher wages might be able to pull more workers into the workforce. The bargaining power looks increasingly in the hands of workers, and with a demand for manpower, workers can consider their choices instead of taking the first job that comes to them.

There is still a need for better visibility into labor supply

The better-than-expected July report is certainly a step in the direction of “great further progress,” which the Fed is looking for. As of July about 75% of the jobs lost during locks last year were added, but there remain 5.7 million fewer jobs compared to February 2020 (see chart). At the same time, labor participation has barely grown since the economy’s extensive reopening this spring.

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We are still looking for the factors that are currently limiting the labor supply to mitigate this fall that need to continue to be hired. However, the increase in the Delta variant is likely to cause a more muted rebound in labor participation over the coming months than we previously expected. Not only have health concerns resurfaced, but even when in-person teaching resumes, the opportunity for outbreaks that intermittently send children home will make it difficult for some parents to commit to new jobs yet.

Therefore, September may still too soon bring clarity to the job that many are looking for. Although additional progress is a good bet over the next month, we don’t expect it to be enough for most of the FOMC to come in with a tightening already at its Sept. 22 meeting even after today’s report. A clearer picture of whether the current weakness in labor supply is largely reduced to short-term frictions or longer-term damage is unlikely to appear until the October jobs report is released on November 5, two days after the end of the FOMC meeting. of November. While this report certainly puts the Fed closer to the threshold of “great further progress,” key Fed officials will likely see that some land still needs to be reclaimed.

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