The economy continued to improve in August, with the unemployment rate falling to 8.4%, well ahead of where economists were predicting just a few months ago. Employment gains have been broad-based, with hospitality and retail jobs showing marked improvement this month. While the latest employment report is a positive development, there are worrisome signs:
• The rate of improvement in employment has slowed over the past three months. Further gains over the coming months may prove more difficult.
• The employment portion of the latest consumer confidence report indicates that workers are less positive about the employment outlook six months hence.
• Many companies have begun announcing layoffs as statutory limits expire on the government’s Paycheck Protection Program. The airlines, particularly hard-hit during the pandemic, are lobbying the government for an extension.
The employment picture may begin weighing on consumer spending, the backbone of the US economy. The latest spending and retail sales figures remain positive, but their growth rates have deteriorated portending a possible stall in the recovery.
While the employment picture is giving mixed signals, other parts of the economy give us hope the recovery has more room to run.
• Home sales, both new and existing, are on a solid uptrend driven by mortgage rates being at all-time lows.
• Auto sales have surged as families move away from urban centers to the suburbs in addition to increased domestic leisure travel.
• Durable goods orders, which fell dramatically in March and April, have surged for the past three months to recover all but 6% of lost production. Scant inventories should help to sustain the expansion over the coming months.
• The August ISM Manufacturing survey came in at 56% with an improvement in 15 out of 18 industries.
• Trade, while still below pre-virus levels, grew at 11.5% in August. On a sour note, the trade gap continued to widen for a fifth month to a level not seen since 2008.
The latest inflation numbers have increased markedly intimating a return to healthy growth. Concerns of a deflationary spiral have dissipated along with the prospect of negative Fed policy rates. The Atlanta Fed’s GDPNow model estimates 3rd quarter GDP at 29.6% following a -31.7% in the 2nd quarter. Their estimate may be slightly high but most economists are calling for 20% plus in the next report.
Bottom Line: The economic recovery that started in May remains largely in-tact. Employment, while directionally positive, is showing signs of slowing as many businesses struggle to fully reopen. Manufacturing and trade have been strong as companies work to replenish depleted inventories. The services sector is returning to normal although employment remains tepid in those industries still being affected by the virus. Another round of government support may be necessary to bridge the gap depending on how the recovery progresses over the coming weeks.
