Probably Not The Swan You’re Looking For

Market participants will be treated (and I’m not sure that’s the right word in the current environment) to a smorgasbord of data in the new week, including June payrolls.

You might argue that NFP has the potential to reset the macro narrative, but how many times have you heard that? If you immerse yourself in the cacophony (not recommended), you’ll come into every Monday thinking the new week has “game-changer” potential.

To be sure, traders are waiting for signs that labor market frictions are diminishing. We’ve had consecutive payrolls disappointments against upside inflation surprises. That’s not the most favorable juxtaposition. Consensus is looking for 700,000 on the headline NFP print (figure below).

By now, almost everyone (i.e., market participants and otherwise) is apprised of the debate. Critics of enhanced federal unemployment benefits insist that ongoing, emergency support is a disincentive for the jobless — that Americans are being “paid more to stay home,” as the talking point goes.

There’s doubtlessly something to that. But it’s woefully insufficient as a holistic explanation and some evidence suggests it’s not true at all, depending on the circumstances.

Anecdotal accounts of employers forced to offer generous incentives to coax workers from the sidelines are a mainstay in the media. Surveys are chock-full of quotes from businesses desperate to fill open positions.

The gap between vacancies and hires sits at a record (figure above).

But, as noted, there’s (much) more to this than enhanced unemployment benefits. At a very basic level, nobody should be particularly surprised that it’s taking a while to rehire everyone who was fired in March and April of 2020. After all, more than 22 million people lost their jobs in just eight weeks last year (figure below).

It took more than a decade to hire 20.5 million people. Small wonder there are still 7.6 million unaccounted for after we fired all of them (plus 2 million). This is just another manifestation of the (by now familiar) refrain about it being “Easier to shut an economy down than to open it back up.”

At the same time (and as discussed in these pages on too many occasions to count), the pandemic has forced a rethink of the labor-capital relationship. For the first time in decades, labor has a bit of leverage. Progressive politicians (at least one of whom is a bonafide celebrity) are trying to give labor even more clout. It’ll take time for a new equilibrium to materialize.

Meanwhile, there are childcare concerns as the country fumbles its way towards a return to full in-person learning. And despite the Biden administration’s objectively successful vaccination push, robust herd immunity isn’t likely to be achieved in the US, which means occupations that entail sharing air with people in close proximity are still a semblance of risky. And don’t forget about the “Delta” variant, which is becoming more concerning by the week.

Perhaps most importantly, the proliferation of work-from-home arrangements means some workers may hold out for jobs that offer more flexibility. Remember, it’s not at all uncommon for “front of the house” workers in the food service industry (i.e., servers and bartenders) to have college degrees. Some of those workers may be reevaluating their situation with an eye towards applying for jobs that allow them to use their degrees and work from home.

All of that makes it exceptionally difficult to determine whether the US labor market is underperforming or just being held back temporarily. I wish I had something groundbreaking to offer in terms of how all of this gets resolved. But just like everyone else, the best I can do is (re)sketch the contours and contextualize the debate.

Notably, any sign that the labor market is set to accelerate rapidly (e.g., the elusive 1 million+ NFP headline) could compel the Fed to reassess the distance between where things stand now and the “substantial further progress” threshold for policy tightening. Some Fed officials believe that threshold has either already been met, or else will be within the next three months. A few NFP scorchers and the debate could start to center around an accelerated taper timeline which could, in turn, bring forward liftoff.

Also on deck in the new week: Consumer confidence, housing data, ISM manufacturing and factory orders.

Remember: It’s almost never the scheduled events that get you. If it’s on the docket, it’s probably not the swan you’re looking for.