When examining July 2021’s economic reports, enormous job growth rippled across the economy. Fortunately, the job growth could not have come at a better time as unemployment benefits abruptly ended.
With federal unemployment aid ending but COVID-19 numbers growing, the economy faces a period of instability. Meanwhile, investors monitor the many ever-evolving situations across the country. Overall, July’s reports show promising growth in jobs, housing, and inflation that may point toward economic recovery.
ISM Reports Reveal Enormous Job Growth
In their monthly report, the Institute of Supply Management (ISM) revealed very strong results. The national services index unexpectedly surged to 64.1, a record high. Also, the national manufacturing index came in at 59.5. Levels above just 50 indicate that the sectors are expanding. Readings above 60 are rare.
Of note, a large number of companies reported difficulties in hiring enough workers to keep up with growing demand.
Enormous Job Gains Is Good for the Economy
Around that same time, the labor market posted enormous job growth. While this is great news for the economy, the data reflects negatively against mortgage markets. As a result, mortgage rates ended a little higher.
The economy gained 943,000 jobs in July 2021. Thus, July’s figures trounced the consensus forecast of 850,000. Additionally, analysts revised June’s data to be even higher. The leisure and hospitality sectors added a massive 380,000 positions. Most of the job growth in these industries took place in bars and restaurants.
Along with the job gains, the unemployment rate declined from 5.9% to 5.4%. conclusively, unemployment plummeted well below the consensus forecast of 5.7%. Average hourly earnings, an indicator of wage growth, jumped 4.0% higher than a year ago. Similarly, average hourly earnings increased from 3.7% last month.
As see with the ISM report, labor market pace significantly improved. However, analysts and investors await COVID-19’s impact on future results. Unsurprisingly, a large proportion of the jobs gained this year occurred in pandemic-impacted sectors. This includes the aforementioned bar and restaurant scenes.
Fed officials repeatedly noted that labor market goal progress largely determines monetary policy changes. Throughout the pandemic, the Fed heavily purchased bonds and mortgage-backed securities.
Mid-August JOLTS Report Sees Enormous Job Growth
The JOLTS report measures job openings and labor turnover rates. With the reveal of the latest JOLTS report, its clear that the United States economy faces a tight labor market due to enormous job growth.
At the end of June, job openings unexpectedly surged to 10.1 million, shattering the former record high. Openings skyrocketed three million higher than they were in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market. Companies struggle to hire enough workers with the necessary skills.
In addition, a large number of employees also willingly left their jobs in June. Experts dub this the “Great Resignation”. Analysts view this as a signal of labor market strength. Generally speaking, people quit only if they expect that they can find better jobs.
Inflation Levels Rise
During a light time for economic data, investors mostly focused on the CPI inflation report. The results fell roughly in line with the expected levels. However, mortgage rates ended with little change.
Along with the enormous job growth, analysts and invested closely watch for inflation updates. Core Consumer Price Index (CPI) indicates inflation levels, but excludes the volatile food and energy components.
In July 2021, the core CPI index rose just 0.3% from June. This represents a decrease from a massive increase of 0.9% last month. Price gains moderated for many items such as used cars. Holistically, core CPI increased 4.3% higher than a year ago, down from an annual rate of increase of 4.5% last month, a level not seen since 1991.
While still very high by historical standards, investors primarily noticed the moderation in inflation compared to the prior month. Fed Chair Powell repeatedly said he believes that higher inflation has mostly been the result of disruptions caused by the pandemic and will be “transitory.” The Fed suspects a recovering economy will lead to inflation returning to normal levels. If the downward trend continues in coming months, it will lend support to his view. Thus, analysts expect the Fed to keep the timing policy tightening.
On the other hand, there is a scenario where Powell is incorrect. In the event inflation remains elevated, it is possible that the Fed decides to tighten bond and mortgage-backed security buying sooner. Since inflation is negative for bonds, the outcome plays a large influence on mortgage rates.
Retail Sales Fall Short of Forecast
Aside from the enormous job growth, consumer spending accounts for over two-thirds of U.S. economic activity. Therefore, the retail sales data indicates economic growth. In July 2021, retail sales fell 1.1% from June 2021. Unfortunately, this result falls below the consensus forecast for a decline of just 0.3%.
Investors grew increasingly concerned about the effect of the spread of Covid-19 on consumer behavior. The latest retail sales report suggests that the impact may be larger than expected.
On the other hand, sales still improved 16% higher from a year ago. Retail sales also hover above pre-pandemic era numbers.
Consumers Shift Spending Toward Travel & Entertainment
As of late, consumers shifted their spending from goods, including retail sales, to services such as travel and entertainment. It goes without saying that service-based spending in these arenas do not fall under the retail sales category.
Simultaneously, the auto industry faces shortages. Because of a lack of chips and other components, auto production fell back. Thus, the limited new vehicle creation led more to declining retail sales than a lack of consumer demand.
Housing Starts Fall; Obstacles for Growth Remain
Given the critical need for more homes in many areas, investors closely the monthly reports on housing starts. The latest housing data contained mixed news. In July 2021, housing starts fell 7% from June. Having said that, housing starts remain higher than a year ago.
By contrast, building permits increased 3%. Building permits represent a leading indicator of future activity. The United States real estate market faces age-old housing barriers. These include rising prices and shortages for land, materials, and skilled labor (despite enormous job growth). Consequently, the rising prices and shortages present an obstacle to a faster construction pace.
In July 2021, sales of existing homes rose 2% from June 2021, slightly higher than a year ago. Inventory levels dropped 12% from last year at this time. Current housing inventory sits at an abysmal 2.6-month supply nationally. Housing experts consider a 6-month supply to be a healthy balance between buyers and sellers. The median existing-home price was $359,900, up 18% from a year ago.
Focus on Fed (originally published on August 27th, 2021)
All eyes were on Fed Chair Powell for additional guidance on future Fed policy. Powell did not provide new information on specific time frames for policy changes.
Near the start of the pandemic, the Fed began buying $120 billion of Treasuries and mortgage-backed securities (MBS) each month to help support the economy. As the recovery has progressed, Fed officials have said that the need for this additional stimulus declined. Investors expect bond purchases to be tapered before the end of 2021. Many officials have recently expressed support for the tapering to start very soon given elevated levels of inflation.
At a highly anticipated speech, however, Fed Chair Powell emphasized the “near-term risk” to the economy posed by the spread of COVID-19. He also repeated the reasons that the recent spike in inflation likely could be transitory due to temporary factors related to the pandemic.
Powell said that he would like to see further progress in lowering the unemployment rate before removing stimulus. In short, there remains a wide range of opinions among officials on the proper time to taper, and investors did not receive the precise guidance they were seeking.
Fed Achieves Inflation Goals
The minutes from the Fed meeting contained no significant surprises. According to the minutes, the Fed achieved their inflation goals. Officials felt “close to being satisfied” with their employment goals after the enormous job growth.
The minutes repeated the belief that elevated levels of inflation will be mostly transitory, but they also noted that risks remained to the upside. Investors now expect the Fed to announce the tapering at the September 2021 meeting. They believe that the Fed will scale back bond and mortgage-backed security purchases in Q4 of 2021. Although the biggest wild card for the timeline remains the effects of the pandemic on future economic activity.
July’s Core PCE Matches Forecasted Gains
The Fed favors the core PCE price index as its go-to inflation indicator. In July 2021, core PCE rose 3.6% higher than a year ago, matching the consensus forecast. This was the same annual rate of increase as last month, but up from just 1.5% in February, and the highest annual rate since 1991.
While economists expected readings of this magnitude during the reopening of the economy, they differ on the long-term inflation impacts. Some feel that the inflation spike is temporary. On the other hand, there is another group that believes higher inflation will persist for years to come.
Surging COVID Cases, Mu Variant Could Cause Alarm for Investors
Investors continue monitoring the COVID-19 pandemic’s status as cases continue to rise. Fears of additional COVID mandates and protocols greatly impacted the economy throughout 2020. In addition, COVID-19 (and its spreading variants) may impact growth for the foreseeable future.
The total number of COVID-19 infections surpassed the number from 2020. Many fear that this could lead to states, or the federal government, acting reminiscent of 2020 to curb the spread. In this event, the economy and businesses would once again take a major hit, potentially affecting the enormous job growth.
Also, the new Mu variant of the virus causes increased worry. Present day, experts debate the vaccine’s effectiveness along with whether a third ‘booster’ shot is necessary.
Government Unemployment Benefits Ending After Enormous Job Growth
Pandemic-induced unemployment benefits begun to lift. After witnessing enormous job growth, investors watch for its impact, especially on restaurant and retail industries.
The end of fiscal support to over 7.5 million Americans could test the strength of the economic recovery, especially in a time of COVID resurgence. Some worry the withdrawal of the benefits could halt economic growth. Some are more optimistic, thinking that this could spur job growth in areas which need it.
Many states—including Texas, Louisiana, Florida, Georgia, Arizona, Indiana, and more—chose to withdraw unemployment programs early, some as early as mid-June.
Experts Predict How Cut Benefits Could Impact Labor Shortage
On the back of Labor Day, experts are having to predict and monitor the impact of ending unemployment benefits. They also discuss the future impact on labor shortage that has impacted many different industries, despite the enormous job growth.
According to experts, a myriad of factors keep people out of the labor force. These factors may not all be because of large unemployment checks from the federal government. These factors include many who switched industries, retired early, people who fear COVID-19, and more.
In addition, investors monitor how the loss of unemployment benefits could impact daily spending in the economy. A report by JPMorgan showed that, due to ending benefits, over 500,000 jobs could be filled in September, but the economy could lose up to $8 billion in spending due to the portion of people who will not land a job.
Looking Ahead After Enormous Job Growth
Looking ahead after the enormous job growth, investors closely watch global COVID-19 case counts. They also observe how additional COVID-19 variants and mandates impact the economic recovery from 2020’s pandemic.
Finally, investors examine the Fed’s monetary policy. Primarily, investors await the curb in government spending and a post-COVID future.
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