The latest employment report disappointed, below even the lowest economist’s estimate. The US added a total of 235,000 jobs during August versus a median expectation of 733,000, with restaurants being the weakest part of the report, shedding 43,000 jobs. A weaker report was not a total surprise given the surge in the Delta variant of COVID19. On the bright side, the past three months were revised upwards by 277,00 jobs. The unemployment rate fell from last month to 5.2%. Adjusted for the current participation rate of 61.7%, a more comprehensive measure of unemployment is closer to 10%. The economy has much ground to make up before the Federal Reserve can announce mission accomplished.

Supply chain issues continue to gum up global trade. Ford, GM, and Toyota have all reduced the production of vehicles until semiconductor production catches up with the current stock of unsold cars. Retail sales were off during the month across a wide swath of products, with many retail outlets complaining of a lack of products to sell. A record number of container ships sit off the coast of California waiting to be offloaded, citing a shortage of trucks and drivers to unload the cargo. These issues will get resolved with the 2nd quarter of next year being our best estimate. The challenge will be if consumer demand holding steady until that happens.

The inflation picture remained broadly consistent with last month’s view. Consumer inflation abated somewhat while producer prices increased at a faster pace. The Federal Reserve telegraphed that price levels had risen enough for them to begin tapering asset purchases in the coming months. We guess that the latest employment report and the surge in virus cases will push any eventual tapering timeline back at least by a month.  Ultimately it will be a healthy sign if they can remove some of the life support from the economy in the coming quarters.

Bottom Line: August brought a disappointing employment report on the back of surging virus cases. We see this as a speed bump in the recovery and not a sign that it has been derailed. With job openings remaining at record high levels, there is little reason to see why the unemployment rate will not continue to fall. Supply chain issues are improving, but there is much more needed to restore pre-pandemic levels of inventory. The Federal Reserve remains supportive and will continue to bridge the gap until we reach full employment.