09/07/2021
The resurgent Delta variant of the coronavirus is putting a dent in the pace of economic activity, and that is complicating matters for the Federal Reserve. The economy generated just 235,000 new non-farm jobs in August. Including upward revisions to the prior two-month total, that was half as many jobs as expected, and well below the average of the previous three months.

After averaging 300,000 new jobs a month since January, employment in the leisure and hospitality sector was unchanged in August, as rising infection rates have slowed the pace of economic reopening. The slowdown can be seen in data such as Open Table dining reservation trends, which have slumped since the start of July, just as the virus began to intensify. And average daily traffic totals at TSA checkpoints during the last week in August were down almost 20 percent from the last week in June. On June 30, the seven-day average of new daily covid infections nationwide was 12,541. At the end of August it was 160,383.

A Disappointing August Jobs Report Puts the Fed’s Next Move into Question

Owing to previous difficulties with seasonal adjustments, the labor report for the month of August has something of a reputation for inaccuracy, so it may be too soon to draw any conclusions. But the disappointing jobs growth would seem to make the path toward tapering its bond purchases a little less certain for the Fed. In his recent speech at the virtual Jackson Hole symposium, Chairman Powell said most participants felt that if the economy proceeded as expected, it could be appropriate to commence tapering this year. That would mean an announcement regarding tapering would have to come soon to give markets advance warning, possibly as early as the September FOMC meeting in just two weeks. If not in September, then the only remaining opportunity to provide advance warning and still leave time to begin tapering this year would be the November meeting, which is just eight weeks away. But that calculus was prior to the disappointing August jobs report.

Prior to the onset of the pandemic, in February 2020, the overall national unemployment rate was 3.5 percent. For Blacks and Hispanics, the unemployment rates were 5.8 and 4.4 percent respectively. By April of 2020, the overall rate of unemployment had surged to 14.8 percent, but for Blacks it rose to 16.7 percent, and for Hispanics 18.9 percent. By this August, the unemployment rate overall had declined to 5.2 percent, and for Hispanics it was 6.4 percent. However, for Blacks, the rate of unemployment actually rose in August, to 8.8 from 8.2 percent in July. In his Jackson Hole speech Powell also said that in his view the test of “substantial further progress” on inflation has already been met, but he characterized the labor market as having made “clear progress,” apparently not enough progress to be considered “substantial.” The average job growth in the three months through July was 876,000. Arguably, another month of similar growth in August would have increased the odds of a September taper announcement. Instead, that is now likely off the table, except in the minds of the most hawkish of FOMC members worried that the recent rise in inflation may prove to be more intractable than transitory.

Economic Growth Rates Being Revised Lower Due to Virus Headwinds

The virus headwind, including its ongoing impact on the global supply chain, is resulting in economic growth rates being revised lower. The Atlanta Fed’s GDPNow forecast for third quarter U.S. GDP had already fallen to 3.7 percent ahead of the August jobs report, down from 6.3 percent at the beginning of August. The Philadelphia Fed’s third quarter Survey of Professional Forecasters, updated on August 13, lowered its GDP forecast to 6.8 percent from 7.5 percent. As of August 27, the New York Fed’s GDP Nowcast model was indicating 3.7 percent third quarter growth, down from 4.2 percent at the start of the month. Due to excessive volatility in the data, the model has since been suspended.  

Importantly, the current slowdown likely represents growth deferred, not growth lost, as individuals and state and local governments are flush with liquidity. But slower growth also likely means some downward revisions in earnings growth rates for those sectors most affected by a reopening slowdown, as the virus continues to take its toll. Ultimately, however, slower growth in the near-term likely means more extended growth in the longer-term. And if slower growth delays the Fed’s taper plans even just slightly, markets will welcome that.

The Fed has repeatedly cited, including just recently by Chairman Powell at Jackson Hole, rising vaccination rates, school re-openings, and expiring unemployment benefits as developments that will likely improve the outlook for the labor markets. The month of September will provide a clearer picture of whether those developments are unfolding as hoped, or whether the slowdown in August presages something longer lasting.

Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

The Philadelphia Fed Survey is a survey that tracks regional manufacturing conditions in the Northeastern United States. The intention of the survey is to provide a snapshot of current manufacturing activity in this region, as well as provide a short-term forecast of manufacturing conditions in the area, which may provide an indication of conditions throughout the United States. 

New York Fed’s GDP Nowcast model produces a “nowcast” of GDP growth, incorporating a wide range of macroeconomic data. The goal is to read the real-time flow of information and evaluate its effects on current economic conditions.

Past performance is not a guarantee of future results.

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