Promising Jobs Data Closes Out Positive First Half of 2021

MANHATTAN (CN) — The first six months of 2021 could have been better, but investors are hard-pressed to complain too much, netting double-digit percentage gains in all three major U.S. indices.

Since January 4, the Dow Jones Industrial Average has gained nearly 14% in value, while the S&P 500 and Nasdaq gained almost 16% and 13.6%, respectively. While corporate earnings and the newest stimulus package have driven most of those gains, lately investor optimism has been nudged along by rosier jobs data.

On Friday morning, the Bureau of Labor Statistics reported that the labor market jumped 850,000 in June, about 150,000 higher than many had predicted. The unemployment rate rose to 5.9%, above the expectation it would fall to 5.6%.

Following the news, the Dow gained 154 points on Friday to close out the week up more than 1%. The S&P 500 and Nasdaq gained 1.7% and 2% for the week, respectively.  

Leisure and hospitality represented nearly half the total gains, coming in with a 343,000 increase, though the industry is still down 2.2 million jobs from February 2020 before Covid-related lockdowns took effect. Some sectors, such as wholesale trade, mining and manufacturing, remained relatively unchanged from May to June.

In remarks at the White House following the announcement, President Biden took a victory lap, noting during the first five months of his presidency more than 3 million jobs have been created.

“This is historic process, pulling our economy out of the worst crisis in 100 years,” he said. “Put simply, our economy is on the move, and we have Covid-19 on the run.”

Buried within the good news, however, is the bad indicator that the number of long-term unemployed — or those without a job for more than 26 weeks — increased by 233,000 last month after a 431,000 decline in May. Long-term unemployed represent 42% of the total unemployment picture, according to BLS.

Generally, Wall Street was pleased with the news. The report “paints a picture of a steadily recovering jobs market,” wrote Lydia Boussour, lead U.S. economist at Oxford Economics, adding that “the return to a pre-Covid environment won’t happen overnight and we should be prepared for labor demand and labor supply to be bumpy in the second half of the year as the economy gradually returns to a new post-pandemic normal.”

She predicted a “jobs boom” in the coming months as hiring catches up with labor demand. “We foresee a couple of +1 million monthly job gains this summer, which should allow the economy to recoup over 8 million jobs this year, with the unemployment rate falling to 4.3% by year-end,” she wrote.

Former top Obama administration economic adviser Jason Furman, now a senior fellow at the Peterson Institute for International Economics, also sees the jobs data as promising, even if the economy remains short 9 million jobs from before the pandemic. “Looking forward there is room for continued rapid job growth, particularly if the rate of unemployed workers taking jobs rises to more normal rates over time,” he wrote.

Others remain in a holding position. “While the number is a decent improvement on the May non-farm payrolls number of 583,000, it still doesn’t tell us too much about the overall state of the U.S. labor market in terms of how quickly those U.S. workers who have dropped out of the workforce since February last year are likely to come back,” wrote Michael Hewson, chief market analyst at CMC Markets.

Andrew Hunter, senior U.S. economist at Capital Economics, agrees, noting that “with the labor force rising by just 151,000 and still more than 3 million below its pre-pandemic peak, we aren’t entirely convinced that this is the start of a much stronger trend.”

Friday’s positive jobs report was presaged on Wednesday, when ADP reported in its monthly jobs report that the private sector gained 692,000 non-farm jobs in June. The gains were almost entirely in the service sector — one of the hardest-hit industries during the pandemic — which gained 624,000 positions last month. Of that number, more than half were in the leisure and hospitality space. Construction, mining and manufacturing picked up the remainder of the month’s increase, with 68,000 jobs gained.

As with May’s report, the breakdown among small, medium and large businesses was roughly even, and it shows the economic recovery has not abated. However, the gains are much less than the 4.3 million jobs gained in June 2020 — which was itself only a fraction of the more than 20 million jobs lost two months earlier in one of the worst payroll reports ever — and millions of jobs remain unfilled.

Unemployment data also has continued to salve worried investors, showing the lowest level of claims since the pandemic struck in mid-March 2020. For the week ending June 26, the Labor Department reported 364,000 initial claims, a drop in 51,000 claims from the prior week. This now marks the third consecutive week that initial claims have dropped after claims picked up slightly in early June.

In spite of the improving economic data, the Covid-19 numbers are starting to look distressing again, mostly due to the more transmissible delta-plus variant, which accounts for at least one-fourth of all cases in the United States, according to the Centers for Disease Control and Prevention.

Some on Wall Street are not terribly concerned about the delta-plus variant, though. “The delta variant should not have significant repercussions for the pandemic situation in developed markets,” according to an investor’s note earlier in the week by JPMorgan Chase, which referenced similar worries about the previous B.1.1.7 strain that did not materialize in the markets.  

“The situation is similar to February’s B.1.1.7 scare, when defensive positioning (bonds, growth stocks) in anticipation of doom resulted in a month-long rally in bond yields, value and cyclical stocks, and a decline in bonds and growth stocks,” the analysts wrote.

The other fly in the ointment is inflation, which has been a concern the last couple months, but here, too, data seems to be favoring the optimistic investor who believes inflation is just transitory.

Last month lumber futures plummeted more than 40%, their worst month since the late 1970s. The fall began on May 7, when the price of lumber on the Chicago Mercantile Exchange closed at $1,686 per thousand board feet, the highest ever. By June 30, the price had fallen to $716. While that may be bad news for logging companies, lumber prices had one of the early indicators of rising inflation; falling lumber futures means cooling prices.

“For now, markets are buying the transitory narrative, and it’s not hard to understand why given the base effects of last year,” Hewson wrote. “However, one has to question how much longer they will continue to do so, if this trend of rising prices carries on into the autumn, particularly given that shipping and freight rates are soaring.”

Other reports signal the economy remains somewhat overheated. The Institute for Supply Management’s headline manufacturing index fell slightly to 60.6 last month, but the prices paid index rose to 92.1, its highest level since the 1970s.

“Demand should remain constant, pretty strong through the end of the year, probably into the first quarter of 2022,” Timothy Fiore, the chair of ISM’s survey committee, said in a statement. “Americans have a lot of money saved and they want to spend it. Raw material prices probably won’t start to relax until close to the end of the year.”

Fiore noted that some key indicators over the next months will serve as a good sign post for inflation. “Transportation prices will probably be the first indication that things are starting to level off,” he said.