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Economic Research: U.S. Biweekly Economic Roundup: A Long Way Back To Full Employment


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Economic Research: U.S. Biweekly Economic Roundup: A Long Way Back To Full Employment

The road to recovery continues to be long. The Bureau of Labor Statistics' estimate of 559,000 jobs added to the rosters in May was too small and too late for markets that expected a much larger 620,000. The 492,00 job gains for private payrolls, half the ADP private jobs of 978,000 for the month, were also underwhelming. With nonfarm payrolls still down by 7.6 million (5%) since before the pandemic, the road to recovery is even longer, after factoring in jobs that would have been created absent a pandemic.

Chart 1


A bulk of job gains were in the leisure and hospitality industry, led by food and beverages, as Americans returned to eateries and other venues that opened to near full capacity as 51% of the population (63% for 18+) was vaccinated with at least one dose. Although the gap shortfall in the jobs market narrowed in May, services- and goods-producing industries were 5.2% and 3.8%, respectively, below pre-pandemic levels.

Chart 2


Unemployment Rate Improved, But Labor Supply Not Meeting Demand

The unemployment rate was the silver lining, falling to 5.8% (9.3 million) from 6.1%, as we expected. A more realistic unemployment rate, which adjusts for shortfall in the labor force participation rate, also improved--to 8.1% from 8.4%--but not for good reasons. Still, the participation rate fell 0.1 percentage point to 61.6%, and remains woefully short of pre-pandemic levels across most age groups, except the youngest (16-19 years).

Chart 3


Chart 4


There is no one reason workers haven't yet come back to the labor market in droves. The economy reopened very quickly as the pandemic winded down, and it is taking some time for workers who permanently lost their previous jobs to settle on new ones (skills and location mismatch perhaps); some have child care and elderly care duties; and others likely still have health concerns. Reservation wages are higher than before for these reasons, as well as for lower-wage workers who are supported by the extra unemployment insurance booster amounting to little above $15 per hour.

In that context, it is easy to understand why teenager participation has surpassed pre-pandemic levels while older ages haven't. The share of 16- to 19-year-olds who work rose to 33.2%, the highest rate since 2008. A tight labor market, especially for entry-level work, is benefiting teens heading into the summer. Most teens don't face the impediments that might keep adults out of the labor force: They likely aren't receiving unemployment benefits, don't have family care responsibilities, and tend to be healthy. Teenagers may also be willing to accept near-minimum wage jobs at a time when older Americans could be seeking jobs at $15 an hour or more.

As businesses reopen and the economy strengthens further this year, we expect people who sat on the sidelines to rejoin the workforce, optimistic that they'll land a job. It is reported that governors in as many as 25 states have announced an early end to pandemic-related federal unemployment programs. The federal pandemic-related unemployment programs, which include extra $300-a-week payments, the Pandemic Unemployment Assistance program, and the Pandemic Emergency Unemployment Compensation program, were set to expire on Sept. 6. They are now slated to expire between June 12 and July 19 in the 25 states that have opted out.

The tight jobs market apparently left employees working longer hours at elevated pay. Average weekly hours, a leading indicator for business employment needs, held at 34.9 hours, for the third month in a row and close to 35 hours, a 21-year record, in January. It was 26.6 hours in leisure and hospitality, almost an hour longer than in February 2020. With demand for labor outstripping supply, average hourly earnings rose a strong 0.5% month over month in May, from a hefty 0.7% in April. (The 12-month pace jumped to 2.0% year over year, from 0.4% year over year, as pandemic-driven composition effects are unwound.)

Average wages were artificially boosted early in the pandemic by large losses among low-wage workers, and now that trend has reversed. The Federal Reserve Bank of Atlanta's median Wage Growth Tracker, which tracks the same person year over year, has remained above 3% during the pandemic. It slowed slightly to 3.2% in April (latest available) from its earlier rise of 3.4% in March. As per its recent report (see Related Research), the substantial wage pressures are among low-wage service occupations and a combination of surging demand and reluctant supply.

However, an industry-specific examination suggests businesses have increased hourly wages to meet higher reservation wages of workers. In leisure and hospitality, hourly earnings jumped 1.3% in May from April and are 7% higher than in February 2020. According to the Wall Street Journal, hourly pay for nonmanagerial employees at restaurants and bars was $14.96 in April (the latest month for which data are available), up 6.3% from February 2020.

Chart 5


Capacity constraints are leading to bigger headwinds for U.S. output this year than markets anticipated. Restraint in the May jobs data after a soft April report highlights the capacity constraints given the smaller supply of workers with the required skills to meet production needs in the post-pandemic world. Job gains are limited for sectors where demand is flourishing, and the workweek is remarkably long with the wage boost much faster than expected. Such demand outstripping supply can result in higher imports and lower inventories, higher inflation (transitory or possibly permanent), or higher productivity.

We continue to expect that near-term labor market shortages will be a constraint this year on U.S. GDP as businesses return to normal. The path will not likely be a smooth one, despite a faster vaccination rollout and reopening schedule leading to increased mobility.

Supply Constraints Are Not Only In The Labor Market

The U.S. economic rebound has transitioned from forecast to growing reality amid reopenings. Swift ebbing of capacity restrictions, coupled with consumers eager to reengage with a stimulus-backed purchasing power (2.4 trillion excess accumulate savings as of April), has demand outrunning supply.

Aside from labor market constraints, supply chain constraints have been holding back industrial production gains to fulfill demand.

Goods-producing sectors are going through supply chain bottlenecks that have the manufacturing industry reporting slower delivery times and higher prices paid. The May Institute for Supply Management Manufacturing Purchasing Managers' Index registered a small increase of 0.5 percentage points from last month, at 61.2, reflecting continuing expansion of manufacturing activities. The New Orders Index went up to 67 in May, from 64.3 in April, indicating sustained growth in demand from consumers. Strong demand would force manufacturers to live with the ongoing supply bottlenecks for a while. Most industries surveyed by the Institute for Supply Management reported increasingly slower deliveries in May. The Supplier Deliveries Index continued to increase in May to 78.8, from an already high level of 75 in April. Most industries are also paying higher prices for raw materials. The Prices Index stayed as high as 88 in May, retreating slightly from 89.6% in April, and registering an increase of 12 consecutive months.

Easing In The Second Half Of The Year?

We anticipate the current supply-chain bottlenecks and labor market mismatch to start easing in the second half of 2021. Still, with little historical precedent, we cannot dismiss at this point that short-term disruptions could have a long-lasting ripple effect, but it is more likely that consumer price inflation peaked in the second quarter. Personal Consumption Expenditures (PCE) inflation came in at 4.2% (year over year) in April--and core PCE inflation at 3.1%--but most of the current rise in prices has come from pandemic-impacted sectors where demand is rebounding after collapsing during the pandemic, like travel and restaurants, or in products plagued by supply-chain disruptions, like new cars. Those pressures will likely ease somewhat in the second half of the year.

Chart 6


We would start worrying about a meaningful regime change in inflation if price increases start spreading meaningfully to the COVID-19 non-impacted sectors of the economy. The exceptional government stimulus that brought fears of "overheating" is about to reverse with an unprecedented fiscal tightening, disinflationary by itself despite offset by a hoped-for boom in private sector spending.

The May labor report is unlikely to trigger any big changes in perceptions of the state of the labor market, either at the Federal Reserve or among investors. Tracking the Fed's outcome-based policy rate liftoff guidance, maximum employment is likely approached only in 2023 (as shown in chart 1), PCE and core PCE inflation will likely average slightly above 2% the next two years, and the unemployment rate will decline to pre-pandemic levels in 2023, thus making interest rate liftoff likely a 2023 event.

Table 1

Review Of U.S. Economic Indicators
Release date Measurements Mar-21 Apr-21 May-21 Level year ago Year over year
Labor market
Four-week moving average of initial claims 6/3/2021 in 000 722 621 428 1,989
Unemployment rate 6/4/2021 % 6.0 6.1 5.8 13.3
All employees, total nonfarm 6/4/2021 change in '000 785 278 559 2,833
All employees, total private 6/4/2021 change in '000 724 219 492 3,345
Average hourly earnings of all employees, total private 6/4/2021 m/m,% (0.1) 0.7 0.5 2.0
Average weekly hours of all employees, total private 6/4/2021 (Hours of Work) 34.9 34.9 34.9 34.7
Total nonfarm private payroll employment 6/3/2021 change in '000 519.1 654.3 978.2 3,169.6
Labor force participation rate 6/4/2021 % 61.5 61.7 61.6 60.8
Job openings: total nonfarm 5/11/2021 millions 8.1 5.8
Consumer spending and confidence
Personal income 5/28/2021 m/m,% 20.9 (13.1) 0.5
Real disposable personal income 5/28/2021 m/m,% 22.7 (15.1) (4.4)
Personal Consumption Expenditures 5/28/2021 m/m,% 4.7 0.5 28.5
Personal saving rate 5/28/2021 % 27.7 14.9 33.7
Total vehicle sales 5/28/2021 Millions 18.5 19.0 9.1
University of Michigan: Consumer Sentiment 5/28/2021 Index 84.9 88.3 71.8
Advance retail sales: retail trade 5/14/2021 m/m,% 10.4 (0.3) 46.1
Industrial activity
Industrial Production: Total Index 5/28/2021 m/m,% 2.2 0.5 17.6
Industrial Production: Manufacturing (NAICS) 5/28/2021 m/m,% 3.1 0.2 23.1
Capacity Utilization: Total Index 5/28/2021 Index 74.2 74.6 63.4
Current General Business Conditions; Diffusion Index for New York 5/17/2021 Index 17.4 26.3 24.3 (48.5)
Chicago Fed National Activity Index 5/24/2021 Index 1.7 0.2 (17.7)
Current General Activity; Diffusion Index for Federal Reserve District 3: Philadelphia 5/20/2021 Index 44.5 50.2 31.5 (43.1)
New privately owned housing units started: total units 5/18/2021 millions 1.73 1.57 0.94
New privately owned housing units authorized in permit-issuing places: total units 5/25/2021 millions 1.75 1.73 1.09
New privately owned housing units completed: total units 5/18/2021 millions 1.51 1.45 1.19
Monthly supply of houses in the U.S. 5/25/2021 Months 4 4 7
Total construction spending: total construction in the U.S. 6/1/2021 m/m,% 1.0 0.2 9.8
External trade
Trade balance: goods and services, balance of payments basis 5/4/2021 billions (74.4) (47.2)
Exports of goods and services, balance of payments basis 5/4/2021 billions 200 185.1
Imports of goods and services: balance of payments basis 5/4/2021 billions 274.5 232.4
Import Price Index (End Use): all commodities 5/14/2021 m/m,% 1.4 0.7 10.6
Export Price Index (End Use): all commodities 5/14/2021 m/m,% 2.4 0.8 14.4
Producer Price Index by Commodity: final demand 5/13/2021 m/m,% 1.0 0.6 6.1
Producer Price Index by Commodity: final demand: finished goods less foods and energy 5/13/2021 m/m,% 0.3 0.6 2.3
Consumer Price Index for All Urban Consumers: all items in U.S. city average 5/12/2021 m/m,% 0.6 0.8 4.2
Consumer Price Index for All Urban Consumers: All items less food and energy in U.S. city average 5/12/2021 m/m,% 0.3 0.9 3.0
Personal Consumption Expenditures: chain-type price index 5/28/2021 m/m,% 0.6 0.6 3.6
Personal Consumption Expenditures excluding food and energy (chain-type price index) 5/28/2021 m/m,% 0.4 0.7 3.1
Note: Data retrieved from FRED, Federal Reserve Bank of St. Louis; m/m--Month over month, last three months selected. Yearly data is either year-over-year change (%) or level value year ago. Total Nonfarm Private Payroll Employment is from ADP 1. Data retrieved on June 4, 2021.

Table 2

Economic Release Calendar
Date Release For Forecast Consensus Previous
7-Jun Consumer credit (bil. $) Apr 21.0 20.0 25.8
Trade balance (bil. $) Apr (75.0) (69.0) (74.4)
Goods and services exports (bil. $) Apr 205.0 202.0 200.0
Goods and services imports (bil. $) Apr 280.0 270.1 274.5
9-Jun Wholesale sales May 0.8 2.0 4.6
10-Jun CPI May 0.4 0.4 0.8
CPI (excluding food and energy) May 0.3 0.4 0.9
Initial claims, week of 6/5/21 (000s) 365 375 385
Treasury budget (bil. $) May (180.0) (176.0) (225.6)
11-Jun June University of Michigan Consumer Sentiment (prelim) Jun 85.0 84.0 82.9
15-Jun Retail sales May (0.5) (0.4) 0.0
Retail sales (excluding auto) May 0.5 0.5 (0.8)
PPI May 0.4 0.4 0.6
PPI (excluding food and energy) May 0.4 0.4 0.7
Empire State Index Jun 23.0 22.0 24.3
Industrial Production May 0.6 0.4 0.5
Capacity Utilization May 75.0 75.1 74.6
Business inventories Apr 0.4 0.4 0.3
16-Jun Housing starts (mil.) May 1.610 1.654 1.569
Export Price Index May 0.6 0.7 0.8
Import Price Index May 0.6 0.7 0.7
17-Jun Philadelphia Fed Index Jun 30.0 32.7 31.5
Leading indicators May 0.9 1.0 1.6

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The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

U.S. Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
U.S. Senior Economist:Satyam Panday, New York + 1 (212) 438 6009;
Contributor:Shuyang Wu, Beijing
Research Contributor:Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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