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2 things to cheer in August's jobs letdown — and one big worry

·Editor focused on markets and the economy
·3 min read
In this article:
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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, September 7, 2021

With unemployment down and pay up, Delta variant is clearly 'scaring off customers'

The usual summer doldrums — and one particularly implacable virus — clearly took its toll on U.S. job creation last month.

The market’s most closely watched high-frequency data series was an unmitigated letdown in August, with new jobs checking in at 235,000, roughly a third of consensus market expectations and well below July’s blockbuster reading. It dampened Wall Street’s nigh-unbridled enthusiasm, and set the stage for the Federal Reserve’s next policy meeting.

As has been the case for much of the last two years, the resurgent pandemic was a force multiplier behind August’s weak payrolls. Greg Daco at Oxford Economics told Yahoo Finance Live that “a combination of factors” — including COVID-19 — was leading to softer job creation. He added that it may even create a self-fulfilling prophecy leading to an economic deceleration, “weighing on people’s ability to spend because it’s weighing on income.”

Already, grim consumer sentiment readings have become a canary in that particular coal mine. At a minimum, the report calls into question the Fed’s plans to palliate the economy with stimulative bond purchases (which, depending on who you ask, could either be a good or bad thing).

Yet underneath the hood of the U.S. economy’s job machine, there were at least a couple of reasons for encouragement.

First, the unemployment rate dropped to 5.2%, even as the labor force participation rate stalled out at 61.7%, and prior months of job gains were revised upward. During prior downturns, manufacturing jobs have been loss leaders — but the sector has been among the best performers during this recovery, adding 37,000 positions last month.

Strength in the household survey, as well as gains among underemployed workers, were a reflection of what Goldman Sachs called “improvement in overall employment and a small decline in the number of part-time workers for economic reasons.” Meanwhile, “the number of permanent job losers declined by 443,000, to 2.487 [million],” the bank added.

Secondly, and arguably the most encouraging development, was that average pay jumped 0.6% during the month — up a whopping 4.3% year-over-year.

Previously, the Morning Brief has dissected the reasons that make higher pay a double-edged sword in an inflationary economy. Yet as JPMorgan Chase economist Michael Feroli pointed out, gains were actually the highest in the beleaguered leisure and hospitality category, underscoring how “it is possible that firms are having a hard time finding workers in this low-wage sector.”

All of which brings us to the largest concern underscored by August’s jobs report — namely that leisure and hospitality was in fact the single biggest loser in the data, as Yahoo Finance’s Ethan Wolff-Mann highlighted in his Friday dispatch.

Jobs at bars and restaurants plunged by over 41,000, setting off a four-alarm fire among industry advocates, even though demand for workers in the sector has (arguably) never been greater. So what gives?

Basically, surging COVID-19 cases fueled by the Delta variant are starting to do something I quietly suspected this summer: Keeping patrons at home, and reversing job gains in key consumer-facing categories like retail, bars and restaurants.

In short, it's what Paul Ashworth, Capital Economics’ chief U.S. economist called a “drop-off in high contact services employment.” It suggests that “even though few states have re-imposed restrictions beyond mask mandates, the Delta variant is nevertheless weighing on activity by scaring off customers.”

All of which bodes ominously for momentum heading into year-end, and underscoring how the best laid tapering plans could be put on hold.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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