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Payroll Gains Plunge, Wage Increases Accelerate, Complicating Fed Taper

by Karl Schamotta | September 3, 2021

235,000 jobs were created in the United States last month, suggesting that the highly contagious Delta variant of the coronavirus is inflicting severe damage on the economy. The number, released by the Bureau of Labor Statistics this morning, marked a profound deceleration from July’s upwardly revised 1.1 million-position print, and fell well below median forecasts that stood at 725,000 ahead of the release.

With infection rates surging in many states during the month of August, consumers grew more cautious and many real-time measures of economic activity – from air travel to restaurant receipts – dropped sharply. Fearful individuals put job-seeking plans on hold, while businesses – facing higher levels of uncertainty – paused hiring campaigns. No new positions were added in the leisure and hospitality sector during the survey period, retail employment shrank by 29,000, and 41,500 jobs were shed in food and drink establishments.

This puts tapering on hold: Today’s numbers suggest that that the Federal Reserve’s “substantial further progress” test has not been met. Richard Clarida, widely considered one of the most influential members of the Federal Open Market Committee, told CNBC last week that he would “support commencing a reduction in the pace of our purchases later this year,” if job gains averaged 800,000 per month into the autumn months.

But other details point to widespread worker shortages: The unemployment rate dropped to 5.2 percent from 5.4 percent in July, hitting market expectations perfectly, while a broader measure that includes discouraged and underemployed workers – the U-6 – moved down to 8.8 percent from 9.2 percent in the prior month.

Wage growth rose at the fastest pace in more than a decade: Average hourly earnings climbed 0.6 percent month-over-month – a rate not seen since late 2009 – as businesses competed to hire workers.

Delta could be plateauing: Our read of the latest data suggests that the number of coronavirus infections is rolling over, following patterns seen in other countries earlier in the year. Although hospitals will be dealing with rising patient loads for many weeks yet, the number of new cases identified in many southern states (on a rolling seven-day basis) has lost momentum.

And worker shortages may be transitory: With supplemental federal jobless benefits set to expire this weekend, and most schoolchildren headed back to class, the number of jobseekers is likely to expand in sharply through September.

The jury’s still out: With roughly half the gap with pre-pandemic employment levels now narrowed, the labour market is inching toward recovery, and prices – as evidenced in strong hourly earnings gains – are rising uncomfortably fast. A tapering decision at the November Fed meeting remains highly probable.

The dollar is holding near one-month lows: With liquidity falling across the currency markets as the long weekend begins, the greenback continues to trade defensively. Treasury yields are up marginally, suggesting that the timing of a taper announcement has become less important to markets in general.

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