Chief Investment Officer, Jim Palmer, reacts to the August employment numbers and shares his theory on the continuing road to full employment

Friday’s stellar employment report gave comfort to markets after Wednesday’s disappointing ADP Employment Change report. Non-farm Payrolls grew 943,000 in July, not including another 119,000 in positive revisions to May and June. The U3 Unemployment Rate fell from 5.9% to 5.4% and the Labor Force Participation Rate ticked up 0.1% to 61.7%, still well below pre-COVID highs of 63.4%. The 943,000 gain in payrolls is consistent with the types of gains the Federal Reserve (Fed) needs to see before tapering asset purchases.

The strong July employment report is indeed heartening, but I have a little theory on employment, the Fed and the bond market. It may be easiest to follow in bullet points:

• Through July, the economy is still short 5.7 million jobs from the February 2020 level (pre-COVID). Yet, Q2/2021 nominal GDP is $1.028 trillion higher than the pre-COVID $21.694 trillion level in Q4/2019, which means companies have figured out how to manage their businesses with fewer workers.
• Current job openings stand at 9.2 million, which is an historically high level but perhaps not as great as it appears. In the five years prior to COVID, job openings averaged about 6.4 million. There are always job openings given the dynamic nature of the U.S. economy and the constant shifts in business formation and worker mobility.
• Hang with me here. Let’s say the gap between current jobs opening (9.2 million) and the trailing pre-COVID average (6.4 million) is closed by 2.8 million workers being immediately hired today. That would still leave the economy 2.9M jobs short of pre-COVID Non-farm Payroll levels.
• There is another aspect to consider. Non-farm Payrolls averaged about +194k per month in the five years prior to COVID. Extrapolating out these average gains, the economy should have added about 3.3 million jobs in the past 17 months in a normal environment. Adding together the 2.9 million jobs shortfall and the 3.3 million jobs the economy should have gained, we are back to a 6.2 million job undershoot.
• My question is, where are those jobs going to come from? I think getting back to full employment is going to be a tough and long slog, especially getting those last couple million workers back on the job. The Fed seems to agree with me, which would explain Fed Chairman Powell’s steadfast commitment to monetary accommodation despite headline-grabbing inflation data and increasingly vocal criticism of Fed policies. The bond market seems to agree with me as well. Sure, there are technical factors (ex: Quantitative Easing, pension positioning) driving the ten-year U.S. Treasury yield below 1.30%, but I believe the bond market has sniffed out that despite the current tight labor markets, getting to full employment is a ways off.   

Source

Bloomberg