Baker Market Update – wk210903

The first week of September brought relief to long-suffering college football fans along with a slew of economic data that raises questions about the pace and strength of the US economic recovery. The recent data stream included a disappointment from the Dallas Fed’s manufacturing index which came at 9% versus 23% estimated, and down sharply from 27.3 the prior month. We also saw another ugly consumer confidence survey, this time from the Conference Board which clocked 113.8%, a drop of over 15 points. The ISM manufacturing index ticked up slightly to 59.9, but that’s still far below the 64.7% high last March. Numbers for factory orders, durable goods and capital expenditures all came in close to estimates, but that certainly cannot be said about the non-farm payrolls employment data released this morning.

The labor department tells us that job creation for August was a paltry (by comparison) 235k versus a consensus forecast of 733k and the prior month’s revised gain of over 1mm. Moreover, the participation rate remained unchanged at 61.7% and hours worked showed no improvement for the month. There was noteworthy weakness in the services sectors such as retail, leisure and hospitality. That is almost certainly an effect of the rising number of COVID-19 cases tied to the Delta variant which has slowed the return to work for employees in those sectors. Importantly, there are large and growing disconnects between available jobs and available (and qualified) workers to fill those openings. This is not just due to COVID knock-on effects, but also caused in part by the challenge of skills mismatch. The longer people are out of work, the more likely they are to lose their ability to compete in a labor market where technology is quickly changing how work gets done. Fully 37% of unemployed persons have been out of work for more than half a year. These mismatch dynamics are part of the reason that average hourly earnings popped by 4.3% YOY, well above the 4% estimate, as employers pay up to find qualified workers. One bright spot in the report was the so-called “underemployment rate” (those working part-time but wanting full-time) which has steadily fallen from its 22.9% high to just 8.8% today. And the headline unemployment rate dropped two ticks to 5.2%, the lowest level since COVID first hit.

As for Fed policy and market behavior, we were reminded by Fed Chairman Powell at Jackson Hole last week that there is an important distinction between reducing or “tapering” the pace of Quantitative Ease asset purchases and actually raising the Fed Funds rate. That distinction, along with sluggish growth data, would argue for a steepening of the yield curve which is indeed what we are seeing as the week comes to an end. There may be an argument that the urgency of tapering is lessened, but it’s a fairly weak case. If for no other reason, that’s because the distortion effect on financial markets needs to be removed and a steady chorus of FOMC officials has said as much. For now, the bond market seems content with a somewhat steeper curve, and an eye toward the next batch of numbers which include the JOLTS job openings report and wholesale inflation data next week.

US Long-Term Unemployment: 2005 – Today

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