Question Marks and Market Implications: Interpreting the June Jobs Report

The June U.S. employment report had some things to like and some elements that were concerning. It also left us with a lot of questions. Here's my take on what this employment report means, what the big question marks are, and how I think the jobs market will evolve from here. Net Hiring Very Strong, Ignore Household Survey Number The headline Non-Farms Payroll figure showed net job growth of 850,000 in June, up from 583,000 in May. Not surprisingly, there were huge gains in the restaurant, hotel and entertainment/leisure industries. The combination of those sectors added just over 300,000 new jobs and are now up almost 1.2 million so far this year. Employment in these sectors was about 16.9 million in February of 2020 and is now 14.4 million, so there's still plenty of room for growth. Job growth away from those sectors was strong as well. I've been watching these sectors, which I've been referring to as the non-lockdown sectors, to get a sense of what the pace of job growth is likely to be once the lockdown sectors recover. So far this year, this group has grown about 0.9%. If translated to the whole labor pool, that pace implies monthly job gains of about 213,000. That's probably a good guess as to the run-rate job gain number once the lockdown set gets close to fully staffed. I have seen some commentators point out the weak Household Survey number (-18,000) as some kind of evidence that maybe the +850,000 payroll gain isn't telling the whole story. However, anyone who has seriously followed these employment reports over the years knows better. The Household Survey is notoriously volatile. There were three negative months in 2019 and a negative 619,000 in 2018. None of these were real in the sense that they were lasting. Just noise. Ignore it. The takeaway from the job growth figure is that labor demand is strong and widespread across industries. That's great and all, but we already knew this to be the case. The confirmation is nice, but it doesn't change our picture of the economy. Labor Supply Just as Important as Labor Demand Here's where this report gets a bit more mixed and for that matter, more complicated. Before we get into it, a reminder as to why labor supply is so important. Inflation stemming from a tight labor market is likely to persist even after all the COVID-related supply chain problems are solved. So determining how big the real labor pool is helps us know just how tight the jobs market is. Second, once we truly run out of workers, that is a sign that the cycle is getting closer to an end. The economy just can't keep growing at a rapid pace unless new people are being employed. With all that being said, here's what we learned from this report. Overall growth in the labor force was anemic at +151,000. Overall labor force participation (LFP) was unchanged and remains slightly lower than it was two months ago. At this point in the recovery, with still 3.5 million people having dropped out of the labor force entirely since COVID began, growth in LFP shouldn't be stalling. The details may offer us a clue as to what's going on. Looking at just 25-54 year olds, LFP jumped a good bit higher, going from 81.3% to 81.7% just this month. That's still down from the pre-pandemic level of 83.0%, but +0.4% for a single month is a nice sign. The decline in LFP came from older workers. LFP dropped 0.4% with workers 55-64 and 0.1% with those older than 65. It is only one month, but this might be a sign that a chunk of the labor force dropouts are actually retirements. Maybe people who got offered early retirement as part of a company's layoff plan, or even people who were close to retirement at the threat of COVID plus government stimulus convinced them to go ahead and retire. This matters because these are workers who are unlikely to come back to the labor force even if wages were to keep rising. Already the total of this group considered in the labor force is down 1.2 million from pre-pandemic. If they don't come back, it probably means that overall LFP ends up about 1% lower than it was before. Bear this in mind as you think about the effect of the enhanced unemployment benefits expiring. It might be that the increase in 25-54 year-old LFP is an indication that some people are coming off unemployment and into the labor force as extra benefits start sunsetting. But a fulsome read of the data suggests that there's more going on than just generous government benefits, and it would be a mistake to assume the end of those extra benefits will be a panacea for labor supply. Part-Time Workers Surge One last interesting point that I think goes to the state of labor supply is related to part-time workers. In June the number of people who were working part-time by choice surged by almost 1.2 million. One conclusion is that rising wages is encouraging people to take a part-time job for extra income. However, I'm more intrigued by the timing of this surge. It does not seem like a coincidence that this surge of part-time workers coincided with the end of the school year. It also does not seem like it is teenagers getting summer jobs. First, that'd be covered by seasonal adjustments, but second LFP actually ticked down for 16-19 year-olds in June. I suspect some of this is related to child care and the need for homeschooling during COVID. We know there were parents who quit their jobs because of unavailability of child care during the pandemic. Maybe either the end of remote school has allowed some of these families to get some extra income through part-time work. What are the longer-term implications here? If people who used to work full-time now choose to work part-time, that is de facto lowering the labor supply. We can't say for sure this is happening just yet, although the surge in part-time work in June does suggest the total number of full-time employees grew very slowly or not at all. It is just another aspect of the total labor supply we should be watching. Market Implications Rightfully there wasn't a huge market reaction from Friday's payroll report. While I still think tightness in the labor market will only get worse and turn into persistent inflation pressure, I can't say there's anything in this jobs report that proves or disproves that thesis. However, if labor supply doesn't pick up soon, it will pose a major challenge for the Fed. It means that today's inflation pressure is not entirely transitory, and that the time for rate hikes is much closer than they are currently assuming. We will see if that's how it plays out in the coming months, but in my opinion, the risks are growing.

Question Marks and Market Implications: Interpreting the June Jobs Report

Here's what the numbers mean and how the market will likely evolve from here.

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