The Jobs We All Love

We had the much-anticipated Job Data. The economy added 235,000 jobs in August which is far below the economists’ estimate of 750,000. This hints on an on-going labor shortage and that the Delta variant continues to hit on labor market recovery.

The Good Side

The increase was the smallest since January. Investors cheer as it reduces the worry that central bankers will accelerate the pace of bond purchase tapering. Market participants can therefore give greater trust to Uncle Powell’s pledge to keep interest rate low for a long period of time and that itself is a cushion to the stock market.

S&P 500 and Nasdaq welcomed the huge miss as they rose immediately after the data was released.

The Milky Side

The enthusiastic buying slowly faded as market opened lower after investors dived deeper into the data. Although unemployment had fallen to a new low of 5.2% from 5.4% in the prior period, we see weak spots on multiple fronts, suggesting a tight labour market.

When economists think about the best equilibrium, the simple analysis of supply and demand becomes a valuable tool for simplicity as a discussion. Pika World believes that the current state of the economy points to a more significant issue in labour supply than labour demand.

First, the labour participation rate held at 61.7%, given that the labour supply had shrunk. Most economists had anticipated a mild increase. This is worrying. Consistent with our previous writing, we would have expected that the expiration of the enhanced unemployment benefits would have motivated people to return to the labour force to earn an income. Unfortunately, the data does not reflect such a reality.

Considering that labour force participation was at 63.3% before the pandemic, it seems like the recovery pace is slower than we aspire. Moreover, the most significant hit sectors such as leisure and hospitality saw employment stagnant despite employers’ strong desire to hire more workers.

PayDay Come on!

Yes, yesterday update did shed some discussion on wage inflation. The latest data indicated that the average hourly earnings rose faster at 0.6% from a 0.4% increase in July. On a yearly basis, wages are up 4.3%.

Again, this is a surprise since economists had expected wage inflation to cool down as more people return to work. Nonetheless, with some levels of delay in returning to work due to Delta variant and embedded labour economic structure such as early retirements, Pika World believes there is increasing upward pressure on general price inflation.

Settling at Somewhere

Collectively, the latest data shows that prices may move north faster than the pace of labour market recovery. However, given that the Fed has been emphasising more on labour market progress over the inflation concern, Pika World believes that the Fed is unlikely to make a move on tapering in September and a reduced probability of a November taper.

After all, the latest report further cements the most significant threat: growth might be slowing and swirling.