One of the main topics for the rest of the year is the development of the US labour market. Despite GDP is now above the pre-covid peak (although still below the old GDP trend path), employment remains more than 5 million below its peak in February 2020. The reason why the labour market is a major theme is that the labour market is vital for the Federal Reserve’s decision on when to start normalising monetary policy.

Jobs growth disappointed in August, as employment only grew by 235,000. The big question is whether the disappointing jobs report is just noise or a signal that the economy is slowing faster than anticipated amid a big delta outbreak across the country. It could also be a sign that there are supply issues in the US labour market.

Noise: It is important to recognise the volatile nature of US jobs reports, which by the end of the day are based on surveys. So if one month was strong, it is not a big surprise if the next one disappoints, making the average more in line with underlying jobs growth. Therefore, it is usually better to look at the 3-month average jobs growth. Doing so we find that 3M average monthly jobs growth was 750,000.

Slower demand: Supporting the hypothesis that the weak jobs report is due to slower demand is the fact that employment growth in “Leisure & Hospitality ” was in line with what we see in a “normal year”. Emp employment in “food services and drinking places” moved sideways, which is in line with the fact that restaurant bookings moved sideways, probably related partly to delta fears. Other indicators like the employment subcomponent of US PMI have also indicated slower jobs growth. If delta is indeed to blame, we may soon see a small rebound, as delta seems to ease in the US (but may get worse again later in the autumn).

Supply-side problems: There are plenty of signs that there are supply-side problems in the US labour market. Labour demand is extremely high (both measured by the number of job openings and hiring plans) and Americans think it is easy to find a job. At the same time, businesses say that it is difficult to fill positions and there is a lack of qualified workers. Wage growth in the “Leisure & Hospitality” sector, where there are the most job openings, is extremely high from a historical perspective. Still, participation in the US labour market is low compared to the pre-covid levels.

This may sound like a paradox but it is probably related to a couple of things: 1) We have seen a sharp increase in the number of job openings in the manufacturing sector, where jobs are usually more specialised, 2) mothers staying at home because of home-schooling (participation for women between 25-54 years fell more and is still further away from pre- COVID levels than men), 3) more people retired due to COVID-19 and 4) the incentive to work has been reduced by the temporarily higher unemployment benefits, which has been a drag on labour market participation (the extra benefits have now expired). 

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