The Market Today

Seasonal Skew Doesn’t Detract from Broader Evidence in July’s Payroll Report Showing Solid Recovery Continuing

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE (Chartbooks: Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts)

As part of their earnings report yesterday, Moderna said its vaccine remains 93% effective against blocking the coronavirus even after six months. The company’s president, however, also said a third vaccine booster dose would be needed for individuals in the Northern Hemisphere before winter. Adding to a growing list of major companies pausing plans to bring employees back to the office amid rising cases across the country, Wells Fargo pushed its target date back a month from September 7 to October 4 while Amazon said office employees wouldn’t return until January 3, 2022, three months later than the previous planned date of September 7.



Seasonal Skew Doesn’t Detract from Broader Evidence in July’s Payroll Report Showing Solid Recovery Continuing: As expected, July’s nonfarm payroll gain was inflated by skewed seasonality related to changes in employment levels of local educators. Total nonfarm payrolls rose 943k compared with June, topping expectations of 870k and marking the biggest monthly figure since last August, while the private sector recouped a more modest 703k jobs. The 240k difference was driven almost entirely by a seasonally adjusted gain of 220k for local education payrolls. In the five years prior to the pandemic, the local education sector lost an average of 1.14mm jobs in the month of July on a non-seasonally adjusted basis, in part reflecting differing pay-period preferences in contracts of educators. As a result of that seasonality, the BLS included an average positive seasonal adjustment of 1.17 million in those years. While the size of the seasonal adjustment in July 2021 was a comparable 1.12mm, the unadjusted drop was a smaller-than-average 901k, reflecting the unseasonal employment pattern for the sector during the pandemic. As a result, seasonal adjustment issues appear to have accounted for around 240k of the total July payroll gain. In addition to the July tally, the prior two months were revised up by a combined 119k (+88k for June, +31k in May).

The 703k gain for private payrolls in July, therefore, is presumably more reflective of the underlying trend of the broader labor market recovery. July’s gain nearly matched expectations of 709k and represented a slight slowdown in hiring from June’s 769k. Goods-producing sectors added 44k jobs, consistent with June’s gain, as construction payrolls grew for the first time in four months, helping to offset a slightly slower pace of hiring in mining and manufacturing. The services-providing industries recaptured 659k jobs last month, slightly weaker than June’s 724k gain. Underlying services sectors saw a mix of changes. Retail trade was the biggest disappointment, losing 6k jobs after adding 73k in June, only the second contraction this year. Not surprisingly, leisure and hospitality continued to drive the recovery, regaining another 380k jobs last month to shrink the current deficit relative to pre-pandemic payroll levels to 1.7mm.

Average hourly earnings rose a firm 0.4% in July and June (after revisions), both 0.1% better than the gain forecasted by economists; goods-producing and services-providing industries saw 0.4% gains. Wages for the leisure and hospitality sector, where reported worker shortages are most severe, rose 0.9% in July, a step down from the 1.8% pace in June but a continuation of a firmer trend. Also reflecting concerns about imbalances in labor supply and demand, weekly hours worked remained elevated at 34.8, an unusually long workweek considering the current position in the economic cycle.

The household report was strong. Employment rose 1.04mm after declining 18k in June, enough to absorb the 261k workers entering the labor force and drop the ranks of the unemployed by 782k. The former lifted participation from 61.6% to 61.7% while the latter led to a significant decline in the unemployment rate, from 5.9% to 5.4%. The Fed’s June projections included a median expectation for the unemployment rate to end the year at 4.5%.

Bottom Line: Strong hiring reports have become the key focus for attempting to determine when the Fed might begin tapering their monthly asset purchases. While July’s topline figure was boosted by a seasonal adjustment to local education payrolls, the private payroll gain, strong household employment figures, pick-up in participation, and decline in unemployment indicate the labor market continued to recover at a solid pace last month. Combined with evidence of continued imbalances between labor supply and demand, particularly the earnings and work week data, the Fed’s tapering discussions should likely continue ahead as expected.


Fed’s Waller Expecting Big Jobs Numbers: Fed Governor Waller, who earlier this week called for “early” and “fast” tapering of monthly bond purchases if job growth remains strong over the next couple of months, repeated Thursday that he is very optimistic about the economic outlook and expected this morning’s jobs report to show a big number. “If we get another million in tomorrow’s report and close to a million in September’s report, we’ll have recovered 85% of the jobs in the U.S. that were lost in 18 months. It took us seven years to do that coming out of 2009,” Waller said. While he also noted that inflation risk is to the upside, he stated that his base case expectation is that current high readings will pull back into the end of the year.

Senator Manchin Sends Fed Chair Powell a Letter: Senator Manchin, a moderate democrat from West Virginia, plays a pivotal role in an evenly divided Senate as the key swing vote in fiscal policy debates, including current discussions around a bipartisan infrastructure bill and a larger bill Democrats hope to pass through reconciliation. However, he made headlines Thursday by voicing his opinion on monetary policy. The WSJ cited a letter the Senator wrote to Fed Chair Powell in which he said “With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy.” “I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford,” exhorting Powell to “immediately reassess our nation’s stance of monetary policy and begin to taper your emergency response immediately.”

Kashkari Not On Taper Train: Minneapolis Fed President Kashkari, one of the most dovish officials, said the economy hasn’t yet made the substantial further progress necessary to begin tapering asset purchases, but could if the jobs market posts strong results in the fall. Kashkari said most of inflation’s recent overshoot was being driven by just a few sectors and stressed the current high readings hadn’t resulted in higher longer-term inflation expectations. The labor market remains in a deep hole and faces risks from the Delta variant.


Investors were feeling optimistic on Thursday, despite growing uncertainties related to the delta COVID-19 variant and mixed signals on the labor market ahead of this morning’s jobs report. The S&P 500 rose 0.6% as the Nasdaq jumped 0.8%, both setting new all-time highs ahead of the official payroll report for July. The Dow also gained 0.8% but finished 0.2% below last Monday’s record close. ADP predicted a disappointing month of hiring in the private sector on Wednesday but was surrounded by solid employment indications from the ISM’s manufacturing and services surveys. Jobless claims data early Thursday morning declined roughly in line with expectations. Treasury yields rose with stocks, pushing the 10-year yield up 4.1 bps to 1.22% and the 2-year yield 1.8 bps higher to 0.20%. The 5-year yield led all gains, adding 4.8 bps to 0.72%. Global equities were mixed early Friday morning ahead of the U.S. nonfarm payroll report but sovereign yields, including U.S. Treasury yields, had moved higher. At 7:20 a.m. CT, the U.S. equity futures were more or less flat while the 10-year Treasury yield had risen 2.3 bps to 1.25%, the 5-year yield had risen 1.0 bps to 0.74%, and the 2-year yield had added 0.6 bps to 0.20%. After the solid hiring report, the 2-year yield was 1.4 bps higher, the 5-year yield had risen 3.9 bps, and the 10-year yield was up 5.7 bps to 1.28%, its highest mark in nine days.


CBO Says Bipartisan Infrastructure Bill Would Add $256B to Deficit Over 10 Years: The CBO released its scoring of the roughly $1 trillion bipartisan infrastructure bill which includes additional spending of $550 billion in excess of already-expected baseline levels. The CBO said the bill would increase the deficit by $256 billion over 10 years, with the revenue components of the law raising around $50 billion in additional revenue. The group of Senators who negotiated the agreement have said other steps they would recommend, which they expected the CBO to leave out of their analysis, would come close to covering the entire cost of the new spending.

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