By Christine Cooper and Rafael De Anda CoStar Analytics
September 7, 2021 | 6:58 AM
Recent economic reports have shown the impact of rising COVID cases as the delta variant spreads across many regions of the nation, disrupting business operations and hiring, and slowing economic momentum as the summer comes to an end.
Citing the health crisis, many workers have fallen out of the labor force either to retire or to limit exposure to themselves or their loved ones. Labor shortages, as well as other issues, are causing delays at ports, and shortages of materials continue to beleaguer construction and factory activity.
Monthly nonfarm payrolls in August grew by 235,000 jobs, the lowest number since January, according to data provided by the Bureau of Labor Statistics, and far below expectations. A much higher figure was expected, as many schools and daycare facilities began to reopen after the summer break, allowing more workers to return to the office. But the sharp increase in COVID cases laid those plans to waste. However, 235,000 jobs gained would be a strong report had we not been recovering from pandemic-related losses. Monthly payrolls averaged roughly 180,000 new jobs in the three years prior to the pandemic, 2017 to 2019, the same as the three years following the Great Recession, 2011 to 2013. Moreover, June and July payrolls were revised higher by 134,000 jobs.
Hiring was led by professional, scientific and technical services, which added 59,000 jobs in August. The sector has surpassed pre-pandemic payroll counts by 188,000 jobs as many firms have been able to shift workers to remote work. At the same time, office market conditions appear to be steadying, with quarter-to-date net absorption currently at -1.3 million square feet compared to -15.3 million square feet in the second quarter and -43.8 million square feet in the first quarter. Similarly, transportation and warehousing firms added 53,000 jobs and have now exceeded pre-pandemic employment by 22,000 jobs.
It was a step back for service sectors, following several months of strong job gains. Pent-up demand for dining out, traveling and shopping led to steady gains in the spring and early summer, but 35,000 jobs were lost in accommodation and food services and 29,000 positions in retail trade in August.
The unemployment rate ticked lower over the month from 5.4% to 5.2%. At 61.7%, labor force participation was steady in August but remains well below its pre-pandemic peak of 72.8%. Compared to February 2020, there are 2.9 million fewer workers in the labor force, while the number of unemployed workers has risen by 2.7 million.
Competitive hiring and elevated job openings appear to be driving higher wages. Average hourly earnings in the private sector grew by 0.6% in August — the fastest pace since April. Over the year, hourly wages grew by 4.3%.
Notably, wage growth in the leisure and hospitality industry — which includes accommodation, food services, and arts and entertainment — remained elevated in August. Hourly wages in the sector rose by 1.3% in August, by far the fastest of any sector. But at $18.82 per hour, this is also the lowest average hourly rate earned across industry sectors. Widespread wage gains are not really occurring yet across most industries.
Overall, the report was weaker than hoped. This probably puts earlier expectations of monetary tightening on the back burner. Only days ago, there was much talk of the Federal Reserve commencing the tapering of asset purchases before the end of the year. That now seems unlikely. Despite several regional Fed presidents urging a move this fall, Chairman Jerome Powell continues to be cautious, especially as the participation rate remains far below pre-pandemic levels. At his Jackson Hole, Wyoming, speech in late August, he noted that while “clear progress” has been made in the labor market, a few more strong monthly jobs reports would be needed to confirm that momentum will continue. This was not such a report.
Trade Balance Remains Low
The nation’s trade balance remains near an all-time low. However, exports of goods and services grew faster than imports in July and the trade deficit fell to $70.1 billion from its record high of $73.2 billion in June.
Many ports around the world are having trouble handling the growth of cargo shipments as strong consumer demand and shortages of workers have combined to create shipping bottlenecks at most major ports. It was reported last week that a record 47 ships were anchored waiting to unload cargo at the twin ports of Los Angeles and Long Beach, California, which are handling a record amount of cargo. That may ease soon as consumer demand cools and trade in goods softens. Trade in services, such as education, travel and intellectual property rights, remains in strong surplus for the U.S. and has been rising for years, but net exports of services fell in July as American spending on nondomestic travel — an import of services — soared by 22.6% in July, and intellectual property rights, including the streaming of Tokyo’s Olympic Games, rose by 23.6%.
Construction Spending Slows
Spending on private construction grew by 0.3% in July, the slowest pace of growth since February, according to the U.S. Census Bureau. High material costs and labor shortages affected construction activity that month. However, some material costs, including lumber, have fallen recently and could encourage more development through the remainder of 2021.
Private nonresidential construction spending fell by 0.2% in July and was 3.6% lower than a year ago. The pandemic has driven many developers away from certain nonresidential categories, including hotels, offices and retail. All major universities turned to virtual classrooms for the 2020-21 academic year, potentially expediting the pace toward fully remote coursework offerings. Spending on educational structures remained 20% lower in July from a year ago and 32% lower than July 2019. Moreover, further delays of returning to the office could fuel uncertainty about the future of the office market, limiting investment in that sector.
Residential construction spending, especially for single-family homes, grew soon after the onset of the pandemic, as developers realized that housing was in high demand as households spent more time at home and less time physically at work or school. In July, however, private residential construction spending grew by just 0.5%, also the slowest pace since February. Yet residential construction spending remained 27% higher than a year ago.
A plateauing housing market could slow residential construction activity. In related news, the Department of Housing and Urban Development announced last week its intention to help create 100,000 affordable housing units across the country over the next three years by expanding access to capital for state housing finance agencies.
The Week Ahead …
The week should be relatively quiet on the economic news front.
More insight into the labor market should come from the Labor Department’s Job Opening and Labor Turnover Survey for July, to be released on Wednesday. Job openings have climbed to record highs and layoffs to record lows amid sluggish hiring and workers’ reticence at reclaiming jobs. With most business surveys reporting that firms are having difficulty finding workers with the right skills and abilities to fill their open positions, this apparent mismatch could take some time to sort out. It’s not at all clear that the expiration of most pandemic-era unemployment benefits could motivate some on the sidelines to finally take a job and help move the process along, as many have hoped. It will take a few more months of data to test that hypothesis.
The Producer Price Index for August is scheduled to be released on Friday. Prices have soared recently in year-to-year comparisons but have also been quite firm in their monthly advances. Still, slowing momentum may see producer prices moderate at the end of the summer and ease further into the end of the year.