This is not an exit

Kerry Craig

J.P. Morgan Asset Management

  • Momentum in global growth has unexpectedly softened in recent months. Persistent supply chain disruptions are hampering production, slowing spending and delaying inventory restocking. Drags in the shipping industry are exacerbating these bottlenecks.
  • Meanwhile, concerns around COVID cases are weighing on the service sector recovery.
  • Despite the concerns about the moderation in global activity, central banks are lining up to exit from super-loose monetary policy and ballooning balance sheets.

Economic indicators continue to point towards a slowdown in economic activity around the world. Investors may be worried that a peaking in global growth will lead to a peak in earnings expectations, and equity markets in turn. The U.S. labor market report last week did little to help change this narrative, as only 243,000 jobs were added in the month of August against expectations of 750,000. While disappointing, the U.S. labor market is likely to continue to tighten and fulfill the U.S. Federal Reserve’s (Fed) requirement of substantial progress in keeping this year’s taper on track.

Jobs growth abruptly slowed last month in the U.S. In July there were over 1 million jobs added, but fell to less than a quarter of this number in August. The cause of this drop can be narrowed down to just two sectors; leisure and hospitality and education. The leisure and hospitality sector has been a strong contributor to job gains, averaging 377,000 monthly job growth in the last three months. However, in August this sector added zero jobs on a net basis. The leisure and hospitality sector is the most vulnerable to the Delta variant related concerns. Those sectors less sensitive to pandemic worries continued to post strong job gains, such as professional and business services (+74,000), transportation and warehousing (+53,200) and manufacturing (+37,000).

The presence of Delta restricted activity in the services sector when mobility restrictions were imposed. Delta is now restricting activity in certain services related industries by limiting the supply of labor. There is certainly plenty of demand for workers and jobs to fill.

The June Job Openings and Labor Turnover report from the U.S. indicated there were more than 10 million vacancies in the U.S. This is the highest number of job openings since 2000, and 1.3 million more than the 8.7 million current U.S. individuals classified as being unemployed. Arguably there is a job for everyone who wants one, and there is plenty of anecdotal evidence that employers are having trouble recruiting staff. The latest survey from the National Federation of Independent Businesses illustrated that an astounding 50% of respondents had positions that they couldn’t fill.

Source: BLS, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as at 4 September 2021.

Even with the below consensus jobs number the unemployment fell 0.2%pts to 5.2% and wage growth rose by 0.6% month-over-month. The labor market continues to tighten, and employers are paying more. This reinforces our view that it wasn’t a sharp drop in demand that curbed job growth, but not enough supply.

The big miss on the jobs report is yet another piece of disappointing economic data from the U.S. Consumer confidence has declined and key business surveys have also missed against expectations in recent weeks, the result of a rise in the Delta variant and disruptions to supply chains weighing on economic momentum. However, while momentum has slowed, the U.S. economy has not stalled, nor is it showing signs that it’s about to. Concerns around the labor market and the Delta variant are likely to fade over time providing a continued tightening in the labor market and rising wage growth to support consumption. Business activity remains robust and capital investment has been much stronger so far in this cycle compared to prior ones. Moreover, further large fiscal support from the physical and social infrastructure packages that are working their way through U.S. Congress should add to growth in the coming years if they are passed.

Investment implications

The supply of labor in the U.S. has been curtailed by the increased unemployment benefits offered up during the height of the COVID pandemic, the closure of schools and childcare facilities, as well as workers’ concern of catching the virus. However, emergency unemployment benefits officially ended in September, schools are re-opening and vaccination rates continue to rise. These should alleviate some of the labor supply constraints, allowing for the continued improvement in the labor market.

The implication is that while the August labor market report makes it a little harder for the Fed to clearly signal its intentions to taper bond purchases at the September meeting, it is still likely to begin the taper this year given the broader health of the U.S. economy and outlook for inflation. This suggests that the yield on U.S. Treasuries should lift into year end and next year as the path to policy normalization becomes clear. Meanwhile, investors will have to monitor the impact that higher wages will have on margins and corporate profits.

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.

For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research. This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be used as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our Company’s Privacy Policy. For further information regarding our regional privacy policies please refer to the EMEA Privacy Policy; for locational Asia Pacific privacy policies, please click on the respective links: Hong Kong Privacy Policy, Australia Privacy Policy, Taiwan Privacy Policy, Japan

Kerry Craig
Global Market Strategist.
J.P. Morgan Asset Management

Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.