Economics Weekly - Written by Michael Pearce
The July Job Opening and Labor Turnover Survey (JOLTS) released this week suggests the labor market is in much better health than the downbeat jobless claims figures imply.
The JOLTS report did confirm the sharp slowdown in the pace of payroll growth in July, driven primarily by a big drop-off in the pace of hiring. But the data on separations revealed that the share of workers voluntary quitting their jobs rebounded to 2.1%, from 1.9%, leaving it close to its pre-pandemic level of 2.3%. In contrast, the number of layoffs has fallen dramatically and, at 1.2%, the layoff rate is now back in line with the February level. In contrast, the latest initial jobless claim figures still imply the pace of layoffs was far worse in late-August than during the depths of the financial crisis.
The JOLTS data are backed up by detailed data on labor market flows, which show that the number of people moving from employment to unemployment has fallen close to pre-lockdown rates. That implies the claims data are still being inflated by some other factor, presumably expanded eligibility, and/or the more generous benefits on offer. It is perhaps surprising that distortion didn’t narrow much in August, after UI schemes became markedly less generous as the additional $600 in weekly Federal benefits expired. Whatever the explanation, the JOLT survey suggests that we should not put too much weight on the elevated level of claims when judging the health of the labor market.
Fiscal talks still going nowhere
Even if layoffs are lower than feared, we still expect job gains to slow as the pace of rehiring eases further, in part due to the fading boost from fiscal policy. Unfortunately, there were few signs this week of progress towards a new relief package.
The skinny bill predictably failed in the Senate, but the financial chicanery could potentially help bridge the gap in more promising negotiations between the White House and Democrats. The former said they could accept a $1.5trn package, while Democrats are willing to settle for $2.2trn, down from their initial demand of $3trn+. Even though the headline amounts are narrowing, there is still a huge gulf between the two sides on the details and with just a few weeks of legislative time on the calendar before Congress adjourns, there is little prospect of a package being passed this side of the election.
Recovery in production still lagging
A more modest rebound in manufacturing output together with the shutdown of large swathes of oil production for Hurricane Laura means industrial production probably all-but-stagnated last month.
Although goods consumption is now significantly above pre-pandemic levels, production has been lagging behind, with the latest jobs report showing that the recovery in manufacturing hours worked slowed further. That points to a 0.8% rise in manufacturing output last month.
Elsewhere, utilities output appears to have fallen back last month, reflecting more seasonal temperatures, while mining output looks to have dropped by close to 1.5%, driven by a fall in oil and gas extraction. Most of that should be a temporary fall, driven by Hurricane-related shutdowns in the Gulf. The bigger story is that, with oil prices rebounding over recent months, the rig count has begun to edge back up again, setting the stage for a recovery in mining output over the rest of the year.
Sales growth slowing to a more normal pace
With retail sales back above pre-pandemic levels, there is much less scope now for rapid monthly gains. We expect a 1.0% m/m increase in August.
While the production side of the economy has lagged, retail sales are already above their February level and the control group measure is more than 7% higher. The latter reflects the substitution in demand towards grocery stores, leisure goods and, in particular, online shopping.
Some sectors have continued to struggle and, following the renewed easing of restrictions as new virus cases have trended lower, there is scope for a stronger rise in spending at bars and restaurants in August. Clothing sales may also continue to catch up. But building materials sales probably continued to ease back after their earlier surge, while most other categories saw more modest gains. Overall, we expect headline sales to have risen by 1.0% m/m, with control group sales rising by 0.5%. That shouldn’t be cause for concern, however, when real consumption is already on course to rebound by 40% annualized in the third quarter.
Capacity constraints will soon limit starts
An increase in building permits in July suggests single-family starts returned to their pre-COVID level in August, with a rise to 1 million annualized.
Tight inventory will persuade builders to boost production, but capacity constraints argue against a rapid increase in building. Notwithstanding a recent correction, lumber prices have surged in the past couple of months, and lots will be increasingly hard to find. After reaching a record high in August, we therefore anticipate a small decline in home-building confidence to 76 in September.
Multifamily starts have also recovered quickly. However, a gradual rise in rental vacancy rates, and subdued developer confidence, means starts are likely to have dropped back to 450,000 annualized, leaving total housing starts at 1.45m in August.
Recovery in confidence to continue
We estimate that the University of Michigan consumer confidence index continued to recover in early September.
The Michigan index exceeded consensus expectations in August, increasing to 74.1, as any drag from the expiry of the enhanced unemployment benefits at the end of July was seemingly offset by the positive impact from the downward trend in new virus cases.
The brief drop in the S&P 500 may have weighed on sentiment in early September but we doubt that will have a major impact. The leveling off in initial jobless claims last week at a still-high 884,000 is also a potential cause for concern, but the 1.4m increase in non-farm payrolls in August suggested that the labor market is still recovering at a solid pace. All things considered, we expect the University of Michigan index to have risen in September to 76.0, from 74.1. That would fit with the continued improvement in the Bloomberg confidence index over the past couple of weeks.