This was a healthy jobs report by most measures, and a read through of the unemployment data indicates the same. All of the increase in unemployment (household survey) came from a rise in people quitting their jobs and reentrants to the workforce – signs of strong positive sentiment in the jobs market. Hardly a reason for the Fed to hold make on simply announcing an intention to taper “IF” the economy’s recovery continues apace in the next six months or so. Some 34% of those unemployment fall into this category, up from less than 9% in April 2020. During a normal recovery near half of the unemployed fall into this category. Looking at the 2008-09 recession, it took until the first half of 2013 for this measure to get back to this percentage from a less severe low (28%). The overall unemployment rate has similarly recovered faster.
There are, to be sure, two cycles at work (Covid and regular recession), and the long-recovery unemployment not on temporary layoff continues. The level is back below 4 million, last seen last summer when this number was on the rise. A peak of 4.7 million puts this “regular recession” in the mild category and the Fed should see it as such.
The big, deep Covid cycle continues to recovery rapidly with the economy reopening, as evidenced by the continued strong gains in leisure and hospitality employment and another month of near 200,000 job increases for restaurant work. Since December, employment in jobs paying below the national average for hourly wages is up 3.1% compared to 1.1% for jobs paying above the average (see chart below). One of the bright spots in the June jobs report is the 33,000 increase in temp office workers. This group was lagging in the recovery, perhaps because office work was still remote, and this was an important area of job growth in the expansion ended by Covid.
It clearly costs money to get people back to work, but the sharper growth in hiring for the lower paid job sectors runs counter to the notion that high unemployment insurance payments is preventing the recovery in hiring. We see this run up in wages in the chart below. The overall pace of wage gains is slowing as the economy reopens more fully, although the pace of increase is still above the June 2019 pace.
For all the talk about wage inflation and inflation expectations in general, it is still not evident in how consumers see their wage growth in the coming six months. Expectations for higher wages in six months has yet to recover to pre-Covid levels – and remains well below the 1980s and late 1990s, when people were more willing to borrow against future earnings to buy today what was presumed to cost more tomorrow. This is the essence of an inflationary process, and that has yet to take hold. The reluctance of firms to boost wages to hire despite sharply higher sales prices is yet one more indication of a lack of confidence than these price levels are sustainable. This is not to say the current state of affairs is permanent – but that some great inflation process is not underway.
Lastly, on the issue of scarring and employment and the Fed’s role – it remains where it has been for decades, in skilled labor positions. I can and have argued that for manufacturing a strong-dollar policy is to blame to a point and the Fed is complicit in this. As for construction, there are some longer cycles at play in regard to home ownership that Covid is helping revert to the mean.
In sum, there is little reason for the Fed to continue buying $120bn month in UST and MBS in the name of countering an extraordinary decline in employment. This jobs report confirms that recovery is well on its way, not without risk to be sure, but doing well enough to at least announce an intention to taper in six months or so if everything continues apace.