This is not an exit

• Momentum in global growth has unexpectedly softened in recent months. Persistent supply chain disruptions are hampering production, slowing spending and delaying inventory restocking. Drags in the shipping industry are exacerbating these bottlenecks.
• Meanwhile, concerns around COVID cases are weighing on the service sector recovery.
• Despite the concerns about the moderation in global activity, central banks are lining up to exit from super-loose monetary policy and ballooning balance sheets.
  

Economic indicators continue to point towards a slowdown in economic activity around the world. Investors may be worried that a peaking in global growth will lead to a peak in earnings expectations, and equity markets in turn. The U.S. labor market report last week did little to help change this narrative, as only 243,000 jobs were added in the month of August against expectations of 750,000. While disappointing, the U.S. labor market is likely to continue to tighten and fulfill the U.S. Federal Reserve’s (Fed) requirement of substantial progress in keeping this year’s taper on track.

Jobs growth abruptly slowed last month in the U.S. In July there were over 1 million jobs added, but fell to less than a quarter of this number in August. The cause of this drop can be narrowed down to just two sectors; leisure and hospitality and education. The leisure and hospitality sector has been a strong contributor to job gains, averaging 377,000 monthly job growth in the last three months. However, in August this sector added zero jobs on a net basis. The leisure and hospitality sector is the most vulnerable to the Delta variant related concerns. Those sectors less sensitive to pandemic worries continued to post strong job gains, such as professional and business services (+74,000), transportation and warehousing (+53,200) and manufacturing (+37,000).

The presence of Delta restricted activity in the services sector when mobility restrictions were imposed. Delta is now restricting activity in certain services related industries by limiting the supply of labor. There is certainly plenty of demand for workers and jobs to fill.

The June Job Openings and Labor Turnover report from the U.S. indicated there were more than 10 million vacancies in the U.S. This is the highest number of job openings since 2000, and 1.3 million more than the 8.7 million current U.S. individuals classified as being unemployed. Arguably there is a job for everyone who wants one, and there is plenty of anecdotal evidence that employers are having trouble recruiting staff. The latest survey from the National Federation of Independent Businesses illustrated that an astounding 50% of respondents had positions that they couldn’t fill.

Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as at 4 September 2021.

Even with the below consensus jobs number the unemployment fell 0.2%pts to 5.2% and wage growth rose by 0.6% month-over-month. The labor market continues to tighten, and employers are paying more. This reinforces our view that it wasn’t a sharp drop in demand that curbed job growth, but not enough supply.

The big miss on the jobs report is yet another piece of disappointing economic data from the U.S. Consumer confidence has declined and key business surveys have also missed against expectations in recent weeks, the result of a rise in the Delta variant and disruptions to supply chains weighing on economic momentum. However, while momentum has slowed, the U.S. economy has not stalled, nor is it showing signs that it’s about to. Concerns around the labor market and the Delta variant are likely to fade over time providing a continued tightening in the labor market and rising wage growth to support consumption. Business activity remains robust and capital investment has been much stronger so far in this cycle compared to prior ones. Moreover, further large fiscal support from the physical and social infrastructure packages that are working their way through U.S. Congress should add to growth in the coming years if they are passed.

Investment implications

The supply of labor in the U.S. has been curtailed by the increased unemployment benefits offered up during the height of the COVID pandemic, the closure of schools and childcare facilities, as well as workers’ concern of catching the virus. However, emergency unemployment benefits officially ended in September, schools are re-opening and vaccination rates continue to rise. These should alleviate some of the labor supply constraints, allowing for the continued improvement in the labor market.

The implication is that while the August labor market report makes it a little harder for the Fed to clearly signal its intentions to taper bond purchases at the September meeting, it is still likely to begin the taper this year given the broader health of the U.S. economy and outlook for inflation. This suggests that the yield on U.S. Treasuries should lift into year end and next year as the path to policy normalization becomes clear. Meanwhile, investors will have to monitor the impact that higher wages will have on margins and corporate profits.

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