Key Takeaways from Jobs Report
Friday’s jobs report summarized key developments on the labor front during
September. Although the big miss on job creation made headlines, the key message came from data on wage growth and the labor force participation rate. And disappointment on Nonfarm Payroll did not push Treasury yields lower. Instead, yields rose significantly and the yield curve steepened.
Surprising? Not at all, everything was logical and consistent with economic theory.
Despite upward revisions in the July and August numbers, the 194,000 jobs created last month led to hand-wringing by the administration and by President Joe Biden himself because it was the slowest so far this year. Worker concern about the delta variant and the need for one parent to stay home to provide childcare were mentioned as causal factors. There was also the elephant in the room — a skill mismatch resulting in almost 11 million job openings that the massive stimulus programs have done little to alleviate.
All this brings me to a key takeaway. Despite the weakness in hiring, the increase in average hourly earnings compared with a year ago jumped from 4.0% in August to 4.6% in September. This is partly explained by a labor force that has been shrinking — both month-over-month as well as in comparison with the pre-covid February 2020. In addition to job openings hitting a record high, the so-called Quits Rate (voluntary separation from employers) published by the US Bureau of Labor Statistics remains elevated.
Simply put, inflation is becoming structural. Jobs are plentiful but actual employment is less impressive because of issues on the labor supply front. Those with appropriate skills are able to command higher salaries and change jobs, but there are not enough of them to meet the demands of a transformational economy! Rather than reflect a healthy economy, accelerating wages signal an overall shift in income to skilled workers from those with less or inappropriate skills.
It has been a repeated theme of SriKonomics pieces (e.g., here and here), that hoping to improve the situation by merely adding an inordinate amount of money supply or boosting fiscal stimulus will just make inflation a sustained phenomenon rather than of the “transitory” variety that Federal Reserve Chairman Jerome Powell has repeatedly insisted it is. The latest jobs report points to the increased risk of high and sustained inflation.
Another key detail from the September jobs report was the drop in the labor force participation rate for 25 - 54 year olds (the “prime working age” group) after steadily increasing from May through August. Even if Biden is correct in saying that the lower participation rate was because the survey was done in the thick of delta variant incidence, continuation of bond purchases by the Fed, or adding more trillions of dollars in benefit spending as the President intends, will not correct the situation. On the other hand, programs to develop worker skills to meet the needs of the post-covid economy will.
The rise in yield on 10-year US Treasurys reflects these economic realities. The yield went over 1.61% to close the week compared with around 1.30% at the beginning of September. Over the same period, the spread between the 2-year and 10-year Treasurys increased from 1.11 percentage points to 1.29 percentage points.
As long as monetary and fiscal policies stay on their current expansionary path, they would bolster my expectation that the yield curve will steepen further as the yield on the 10-year rises to 2% in coming months.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
October 9, 2021
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