The undoubted highlight of September 2021 Week 1 was the fall in Non-Farm Employment Change of 235k versus analysts’ estimate of 1053k.
In his recent Jackson Hole Symposium speech, Chair Powell noted that at “the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year”.
In the same paragraph however, he also emphasised a need to monitor “the further spread of the Delta variant”. This latter point has proved prescient given the severity of the third wave of COVID-19 now being experienced by the US and, of course, August’s nonfarm payrolls.
At less than one third of the average of the prior three months, August’s 235k increase was a shocking outcome, particularly as these jobs would have been finalised in mid/late-July when new delta cases were but a fraction of the current level. There were some odd outcomes by industry such as leisure and hospitality stalling after increasing 350k per month for the past six, but no definitive reason to believe August’s print should be dismissed as a statistical aberration.
The questions that need to be asked at this point are: (1) did August’s payroll outcome come about because of changing demand or lingering supply constraints; and (2) how far off course does it put the economy in pursuit of full employment, a pre-requisite for rate hikes.
Given job openings are at historic highs and other indicators of labour demand remain strong, the August nonfarm payrolls surprise looks to stem from supply constraints. This assertion is backed up by the participation rate remaining unchanged for the past four months, 1.7ppts below its pre-pandemic level. If we assume, as the world is, that this surge in US Delta cases will be brought back under control soon, the uncertainty presently impeding job matches should abate in coming months.
This one outcome is enough to preclude a September taper announcement. But, unless it proves the first of a string of weak outcomes, a taper decision at the December meeting will be made, allowing the process to still run to our existing forecasted timetable of January to June 2022.
Employment growth does not have to bounce back to near a million a month for this to occur. Ahead of the August print, we had anticipated a material weakening in job creation from September, with gains from that point to end-2022 forecast to average 450k – a little over half the pace of May to July, and only 80k more than August’s print if prior month revisions are incorporated.
Importantly, job creation of this scale would not only be strong enough to eradicate the remaining pandemic employment deficit of 5.3 million by September next year, but would also, come December 2022, see the creation of a quarter of the jobs that could have been established absent the pandemic, based on the pace of employment growth in the 12 months immediately prior to the pandemic.
Not only can we therefore still justify a first-half 2022 taper timeline, but also a first rate hike in December 2022. This, of course, assumes the current wave of COVID-19 in the US does not get any worse, which is why the FOMC now need to wait until December to make their decision.
However, it is important to emphasize here that August’s weakness was due to supply rather than demand. If average monthly employment growth instead slows materially below 450k into year-end due to a marked weakening in demand, the FOMC will find it difficult to forecast full employment by end-2022. Knowing well from their GFC experience the challenges a protracted recovery poses for an economy and its policy makers, this is not a situation the Committee will want to risk. Hence, if such downside risks crystalize, a taper decision is likely to be further delayed and its pace slowed while rate hikes would be pushed out into 2023.