A Two-Pronged Note on Today’s Jobs Report

Friday, the US Bureau of Labor Statistics (BLS) unveiled its widely watched Employment Situation Report for July. After May’s private-sector employment shocked pundits by rising 3.2 million—and June’s topped it with 4.7 million hires—private hiring slowed to 1.5 million (1.8 million if you include government).^[i] The common reaction to this seems cautious—skeptical. Many pin the slower hiring on the virus’s resurgence this summer and, even though data suggest this renewed outbreak has slowed lately, they project hiring to continue weakening later this year. In our view, this calls for a two-pronged note. One, the job market is unlikely to see a completely straight line to recovery. Two, stocks are very unlikely to fixate on these monthly reports, for good or ill, for long.

First, let’s dig into what July’s report showed. Nonfarm payrolls rose 1.8 million in the month, although this is likely inflated somewhat by a statistical phenomenon tied to seasonal adjustment. July is normally a month in which government employment declines tied to school being out all month in most of the nation. Yet this year, most schools were shuttered way, way earlier. The impact of this, according to the BLS, is that of the 301,000 jobs the data show government adding in the month, up to 245,000 of them are education-related quirks.^[ii]

On the private-sector side, gains were quite broad-based. Leisure and hospitality again led, adding 592,000 jobs. 502,000 of those were in the restaurant industry—bringing the total in the last three months to 2.9 million hires.^[iii] Employment remains down significantly in this industry, but this rebound has been good enough to cut the losses in half—and that seems noteworthy to us. Retailers were the next biggest source of hiring, adding 258,000 people to payrolls.^[iv] Neither of these factors should shock, considering businesses continued to gradually reopen in some parts of the country while those suffering big virus outbreaks mostly just put existing plans on pause versus rolling them back.

The unemployment rate fell 0.9 percentage point to 10.2%—a figure just north of the financial crisis’s 10.0% peak.^[v] Of course, this rate leaves out laid-off workers who haven’t sought a job in the last four weeks and those working part-time due to economic conditions. But the U6 rate, which includes them, also fell—to a still-high 16.5%.^[vi] This rate is down 6.3 percentage points from its April 2020 peak and now sits below the financial crisis’s 17.2% peak rate.

So the lesson here, to us, is that the job market is healing. Yes, the pace of hiring slowed, but that should be expected—renewed outbreak or no. The gradual, structured, uneven reopenings meant we would likely see a quick burst out of the gate as some firms were permitted to return to work. But capacity limitations and other measures mean that return isn’t to “normal.” That likely always meant hiring would slow—and that overall trend should persist, in our view. We would wish for nothing more than the virus to vanish, business restrictions to lift and everyone to return to work next month. But we don’t think that is terribly realistic.

With US stocks hovering around 1% below record highs, some may see the preceding paragraph as a sure sign markets are disconnected from the economy.^[vii] We disagree. While the general public and pundits follow economic data—especially jobs data—very closely, markets are forward-looking. They anticipated the economic fallout from lockdowns in this winter’s rapid bear market. After this, we think they began looking ahead—far ahead. Likely far beyond anything economic data are revealing now. This is doubly true of jobs data, which typically lag economic growth by a long way. A basic thought formula for this is that political decisions to permit reopening beget growth and growth begets jobs. Stocks aren’t going to wait for these things to become reality—they anticipate.

So yes, there is still a long way to go to a job market recovery and progress to that end will be uneven, lumpy and likely slow down ahead. From a social standpoint, we would hope it could be as quick as possible. But for markets, it just isn’t very relevant, in our view.