The Market Today

Strong Topline Payroll Gain Skewed by Seasonal Adjustment to Education; Modest Labor Market Recovery Continues

by Craig Dismuke, Dudley Carter


Strong Topline Payroll Gain Skewed by Seasonal Adjustment to Education: Payroll growth beat expectations in June and there was a net positive revision of 15k to the prior two months, allaying some fears of a slowdown in the labor market’s recovery after a couple of disappointing reports. Total nonfarm payrolls grew by 850k last month, beating economists’ expectations for a 720k gain and marking the strongest month for employment growth since 1.6 million jobs were added last August. Worth noting, seasonal adjustment issues related to hiring in the public education sector artificially inflated the topline number. On a non-seasonally adjusted basis, state and local education jobs declined by 413k, a much smaller drop than is typical for June; the five-year, pre-pandemic average loss for June is 645k. When adjusted for seasonal trends, state and local education ended up adding 223k payrolls or 27% of the total monthly payroll growth.

More Modest Recovery in Private Sector Continues to be Led by Leisure and Hospitality: Nonetheless, private sector payrolls rose 662k, also topping expectations for a 615k recovery. Consistent with recent trends, more than half of the gain came from the leisure and hospitality sector, which picked up 343k jobs during the month. Results were mixed across other sectors. Goods producers added 20k jobs on gains of 15k and 12k for manufacturing and mining and logging; construction shed 7k jobs, the fourth decline in five months. Encouragingly, retail added 67k in its best monthly recovery since last October. Notably, temporary help services posted a 33k gain, the most since February and a potential outworking of certain businesses struggling to find permanent workers. The wages and hours data, however, indirectly showed some relief from labor supply issues. Wage growth cooled from 0.4% in May, revised lower from 0.5%, to 0.3% and hours worked declined from 34.8 to 34.7, a four-month low.

Household Report Less Encouraging with Unemployment Rising Unexpectedly: The household report was less encouraging, with its employment tally slipping 18k from May while unemployment rose 168k. As a result, the unemployment rate increased from 5.8% to 5.9% instead of declining to 5.6% as economists had expected. While the number of individuals employed part time for economic reasons dropped sharply, down 644k in June and dragging the underemployment rate from 10.2% to 9.8%, the ranks of the long-term unemployed grew by 233k. Tracking other key measures Fed officials are watching, the participation and employment rates were unchanged at 61.6% and 58.0%.

Bottom Line: The headline job gain of 850k was surprisingly strong, but also skewed by statistical noise in the adjustment to public education jobs. Although it was the strongest in three months, the private payroll gain of 662k reflected a more modest pace of job recovery. Compared with February 2020’s pre-pandemic levels, 6.76 million jobs have yet to be recovered, with 5.77 million of those missing from the private sector. Many of the other details lack a cohesive message and the unemployment rate’s unexpected rise further weighed on the exuberance elicited from a simple read of the topline figure. Cumulatively, the data is unlikely to sway the broader narrative, particularly among Fed officials.



The S&P 500 started July the way it ended June, with a daily gain that pushed the index to a new all-time high. The broad U.S. equity index rose 0.5% on Thursday to register its sixth consecutive record close. Energy companies led 10 of 11 sectors higher as U.S. WTI crude rose to its highest level since October 2018. Early reports indicated OPEC+ had struck a tentative deal to gradually increase production beginning next month. However, the agreement seemed to fall apart as the UAE objected to the agreement, pushing a potential decision off until today. Consumer staples were the only sector to decline amid the widespread improvement that followed encouraging jobless claims data and a softer-than-expected ISM report that nonetheless indicated demand remained strong. The Dow and Nasdaq also rose, but by smaller amounts that left the indices shy of new records. Consistent with June’s broader theme, the Treasury curve flattened on the first day of July. The 2-year yield added 0.4 bps to 0.25% while the 10-year yield declined 1.0 bp to 1.46%. At 120 bps, the spread between the two yields represented a nine-day low and held near the flattest levels in four months.

U.S. equity futures were up slightly and sticking near their record levels ahead of the jobs report and the Treasury curve continued to flatten. The S&P 500 had added 0.1% but was trailing a 0.3% gain for Nasdaq contracts. Longer yields were leading a flattening decline across European sovereign curves heading into the employment report; 10-year yields on were down between 2.5 and 3.5 bps. The Treasury curve was also flattening in pre-release trade, but on slightly different dynamics. The 2-year yield was 0.5 bps higher to 0.26% while the 10-year yield had dropped 1.5 bps to 1.44%, a ten-day low.


ICYMI – June 2021 Monthly Review: Several economic narratives cropped up in June, including signs of slower housing activity, wobbly infrastructure negotiations, and concerns the COVID-19 Delta variant could slow some foreign recoveries. However, the broader focus was on a market-moving pivot in the Fed’s policy paradigm towards post-pandemic policy normalization amid an advancing recovery, economic dislocations, and stronger inflationary readings.

Solid ISM Manufacturing Falls More Than Expected as Economic Tensions Persist: The ISM’s Manufacturing Index slipped from 61.2 in May to 60.6 in June, a slight disappointment of the 60.9 economists expected. While still among the strongest readings since the mid-1980s, June’s level marked a five-month low. Keeping the headline afloat, production picked up after two consecutive declines, likely driving the decline in orders backlogs from a record-high level. Nonetheless, softer new orders and employment and some relief in supplier delays outweighed the positive impact of the pick-up in production. The level of new orders remained solid but the decline in the employment index to 49.9 was the third in a row and the first contraction since November. Also keeping the focus on tensions between supply and demand, the prices paid index jumped to its highest level since 1979. Offering a fair summary of the broad messaging from respondents across industries, an executive at a machinery company said, “Customer demand remains strong. Supply chain issues continue to hamper materials availability and impact production scheduling. Supplier costs continue to rise due to increasing materials, labor and shipping costs.”

Construction Spending Comes Up Short of Expectations As Business and Government Sectors Remain Weak: Construction spending came up short of expectations for a fourth consecutive month in May. The 0.3% decline disappointed expectations for a 0.4% gain and April’s 0.2% gain was trimmed to 0.1%. The details showed the long-running story of stronger housing and weakness in other arenas continued. Private residential spending, or housing-related construction, continued to improve, albeit at the slowest pace in three months. Non-residential spending, however, declined for a third time in 2021 and for a thirteenth month (out of sixteen) since February 2020. Compared with a year ago, residential spending has risen 28.7% while non-residential spending, or businesses investing in structures, has declined 5.8%. Away from the private sector and combining weakness at the federal and state and local levels, government spending dropped 0.2% and was 8.9% below May 2020’s level.

Harker Hopes Fed Will Begin Tapering This Year and “Keep It Simple,” Say $10B Each Month?: Fed President Harker, who won’t vote on policy until 2023, told the WSJ he “would like to see tapering begin, …sooner rather than later. I’d like to see it being a slow, methodical process.” Harker said the Fed should “keep it simple.” Possibly the first to publicly ponder a potential plan, he speculated that “We’re doing $120 billion a month, if we cut back $10 billion each month, we’d be done in 12 months, right? I think that’s a reasonable thing to do.” Away from asset purchases, Harker said, “My forecast before was not touching the Fed funds rate until 2023. I’m still there right now.”

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