During the Covid-19 pandemic, one of the world’s most important economic indicators lost a lot of its ability to move markets.
US non-farm payrolls data – the monthly employment report – has long been one of the most closely-watched releases available.
The US consumer is the world’s single most potent economic force. So their employment conditions are important for the entire global economy.
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That went by the wayside during Covid as the data was so hard to interpret.
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But as we recover, that’s changing. US payrolls are now widely watched again.
So what did Friday’s figures tell us about the pace of recovery?
US employment figures were worse than expected
The US non-farm payrolls data for May came out on Friday. It revealed that the US economy added another 559,000 jobs for the month.
In the normal scheme of things, that’s a huge amount. But, of course, we’re not in the normal scheme of things. We’re recovering from a pandemic in which equally huge numbers of people lost their jobs. Now that the economy is re-opening, expectations are high for re-hiring.
As Paul Ashworth of Capital Economics points out, given that employment is still 7.6 million below its peak before the pandemic, at this pace, “it would take more than 12 months... to fully eradicate the shortfall.”
That gives you some idea of why markets had expected even more vigorous recovery in the jobs market. So they were disappointed when jobs came in below the hoped-for 675,000.
Yet at the same time, wages rose more strongly than expected. Ashworth notes that the 0.5% month-on-month gain (versus 0.2% forecast) was “even stronger than it looks” because it’s probably being dragged down by the return of lower-paid restaurant staff. It all “suggests that the increasingly acute labour shortages are translating into rapid wage growth.”
The market reaction was telling. The US dollar – which had been rebounding somewhat from an important technical level (read more on that here from Dominic) – immediately took a knock. Stockmarkets meanwhile, picked up a little.
Why? If employment is weak, it means the Federal Reserve, America’s central bank, is going to be very wary about raising interest rates or removing stimulus. At the same time, a bit of wage inflation is no bad thing – the US economy is heavily reliant on consumer spending, so putting more dollars in people’s pockets can’t hurt as long as inflation overall remains under control (which is a different matter, of course).
In other words, it means the “Goldilocks” scenario where the economy is “not too cold, not too hot” gets to continue for a bit longer.
But what about the longer run?
The inflation story is still intact
On that front, it’s interesting to hear what Janet Yellen – formerly the head of the Fed, and now the head of the US Treasury – had to say at the weekend.
She says that the US should push on with its public spending package, even if it ends up pushing inflation and thus interest rates higher: “If we ended up with a slightly higher interest rate environment it would actually be a plus [from] society’s point of view and the Fed’s point of view,” she told Bloomberg.
“We’ve been fighting inflation that’s too low and interest rates that are too low for a decade... if this helps a little bit to alleviate things then that’s not a bad thing – that’s a good thing.”
To be clear, this is not an argument for higher interest rates, as some seem to assume; this is more an argument that it’s still best to ignore concerns about higher inflation. This is an argument to a) allow the government to spend right now (in Yellen’s telling, anyway) and b) focus on employment rather than what inflation’s doing.
As I’ve said before, you don’t need to have interest rates locked to the zero-line to continue with loose monetary conditions. You just need central banks to be raising rates more slowly than inflation is rising. It’s about being “behind the curve” rather than “ahead of the curve”.
At some point, of course, the Fed might have to take action to ensure that markets remain sufficiently behind the curve (which is where things like “yield curve control”, or forced institutional buying of bonds, comes in).
But rate rises in and of themselves do not necessarily constitute a massive tightening of monetary conditions.
More importantly, Yellen remains relaxed – or perhaps complacent – about the threat of inflation. Firstly, she thinks it’s transitory, arguing that any “spurt” in prices will fade away next year, reports Bloomberg.
Secondly, she reckons that central bankers can cope even if inflation does stick around. “I know that world – they’re very good. I don’t believe they’re going to screw it up.”
That level of faith is striking, given what I’d argue is the absence of anything substantive to back it up. But the point is the politics rather than the reality. And for now, the focus is very much on employment and the economy, rather than hypervigilance about inflation.
In turn, that means the “return of inflation” story remains very much intact. The only real question is how quickly it can return and how long it can remain before central bankers do start to worry.
That’ll be a big deal when it happens. But we’re a while away yet.
If you want to learn more about what all of this means for your portfolio, it’s a topic we cover regularly in MoneyWeek magazine. Get your first six issues free here.
