Invesco: April’s Terrible Jobs Report Doesn’t Derail My 2021 Optimism
The April 2021 jobs report was a shocker — a huge miss. It was estimated that non-farm payrolls would grow by slightly below 1 million, while whispers on the Street suggested some expected well over 1 million. But it was not to be — the US saw a relatively paltry 266,000 jobs created in the month of April.1 And what’s more, March’s jobs report was downwardly revised from 916,000 to 770,000.1
Is the economy stalling?
Many people don’t know what to think about the jobs report. Is it a sign that the economic recovery is stalling? I say definitely not, given that we are seeing so many other signs of an economic recovery. For example, both US Manufacturing and Non-Manufacturing Purchasing Managers’ Indexes have risen substantially in recent months. But that doesn’t mean we should have expected a blowout jobs report. The economy is accelerating but it’s not accelerating dramatically — at least not yet. After all, if we go back and look at the most recent Federal Reserve Beige Book released April 14 covering the six-week period ending April 5, it reports that national employment growth “picked up over the reporting period, with most Districts noting modest to moderate increases in headcounts.”2
In my experience, “modest to moderate” increases don’t typically make for a million non-farm payroll month in March or April. And we can’t overlook the role supply chain disruptions might be playing in causing manufacturing shutdowns that in turn have reduced the number of workers needed. That’s certainly what we heard from the San Francisco Fed in the most recent Federal Reserve Beige Book: “… a few contacts throughout the District in the utilities, manufacturing, and agricultural sectors mentioned scaling back work hours, reducing hiring activities, or stipulating hiring freezes. These cost-cutting decisions were brought about partially by shortages in input materials, disruptions to supply chains, and a tightening of capacity constraints.”2
Are generous unemployment benefits creating a labor shortage?
Or does the jobs report indicate that fiscal stimulus — specifically enhanced unemployment benefits — is creating a worker shortage? Many of us are hearing anecdotal information about employers’ attempts to attract workers: the $500 sign-on bonus Wawa is offering, the bonus McDonald’s is offering just to show up at a job interview. A friend of mine texted from North Carolina to say that her favorite fast-food restaurant in town is closed because the owner owns two locations but only has enough employees to staff one of them — so each is closed half the week.
The US Chamber of Commerce agrees; it believes a worker shortage is being created by additional unemployment benefits. It says it performed an analysis that indicates one in four employees now receive more money in unemployment than they earned working.3 In the wake of the April jobs report, the Chamber of Commerce actually called for a cessation of the extra $300 unemployment benefit: “Paying people not to work is dampening what should be a stronger jobs market. We need a comprehensive approach to dealing with our workforce issues and the very real threat unfilled positions poses to our economic recovery from the pandemic.”3 And that was echoed by a number of Fed districts in the most recent Beige Book. In other words, employers have jobs to offer — it’s just that no one wants to fill them.
But is that the whole story?
I think the situation is more nuanced — that there are additional reasons why there is a scarcity of available labor in some regions and industries. One theory is that some parents may not be able to return to work because their children’s schools are still online and/or there may not be enough available childcare. That seems to make sense. I know a number of parents whose children only started going back to school in person in the last several weeks, while others are expected to finish out the school year online, with a resumption of full-time in-person instruction not anticipated until the fall of 2021.
Childcare and other challenges such as health safety concerns and a reduction in available public transportation have all been obstacles for those trying to return to work. This was noted by the Chicago Fed in the most recent Beige Book: “Employers, temp agencies, and workforce development organizations pointed to a number of factors limiting labor supply, including health safety concerns, childcare challenges, cutbacks in public transportation schedules, job search fatigue, and financial support from the government.”2 These obstacles fall under the broader category of mobility and commerce restrictions, a problem articulated by the San Francisco Fed district: “In general, employment has recovered faster in regions where mobility and commerce restrictions were lifted sooner.”2 Where there are mobility restrictions, public transportation is limited and where there are commerce restrictions, typically we see childcare centers operating below full capacity.
The threat of inflation
Of course, the main concern about an inability to find enough labor is that it could create very substantial wage increases, which in turn can create “sticky” inflation rather than the transitory inflation that the Fed expects. However, I think it’s unlikely that we will see a dramatic, prolonged rise in wage inflation even if there is a labor shortage. It seems that, for now, many employers are looking to utilize one-off sign-on bonuses in order to attract workers. For example, as the Minneapolis Fed noted, “Multiple contacts mentioned growing prevalence of sign-on bonuses, which helped attract candidates without raising long-term salary commitments.”2 Similarly, we heard from the Philadelphia Fed that “signing bonuses — a common practice in the warehouse sector — were reported by several contacts in the hospitality sector …”2 Certainly some employers are raising wages, but thus far they appear to be relatively modest in general.
Companies are also considering other ways to keep a lid on labor costs. For example, the Cleveland Fed reports, “In some cases, contacts indicated that they were planning to adopt more technology (in lieu of more employees) to keep up with demand.”2 The Atlanta Fed reported that “some firms plan to utilize full-time remote positions to attract and retain workers for hard-to-fill positions.”2
So where do we go from here?
To me, it’s clear that the US economy will accelerate, which should mean swifter employment growth. I expect a rise in wages along with it, but no dramatic wage increases given that any labor shortage should be short-lived. After all, most schools will re-open for in person learning by September, and daycare centers will also be re-opening and ramping up capacity. And if more employees enter the labor market when schools go in person and daycare centers and public transportation resume operations at full capacity, then any wage pressures would ease. Public transportation schedules are also likely to return to normal in coming months, adding to the available pool of labor. And those holdouts because of health safety concerns are likely to start returning to the labor force as vaccination rates go up and COVID-19 rates go down. And don’t forget that there will be a significant number of newly minted high school and college grads entering the workforce in the next several months. And since enhanced unemployment benefits are due to expire in September and states have the ability to cancel them earlier (two have already announced the cancellation as of June), that should certainly create a big influx of workers.
And so in my view, we shouldn’t fixate on a single data point or become overly worried by one jobs report. US Treasury Secretary and former Fed Chair Janet Yellen was keenly interested in the labor market — and its potential impact on inflation — but recognized that she needed to look at a mosaic of data to more fully understand it (in fact, she had a 19-point Labor Market Conditions Index created so she could follow a wide variety of metrics over time.) In the spirit of Secretary Yellen, we will be following the many nuances of the US labor market closely. At the same time, we should remind ourselves how committed the Fed is to patient accommodation. All in all, I expect 2021 to be a good year for the economy, the labor market and for investors who are willing to remain invested, and who maintain broad diversification and a longer time horizon.