All we can say is wow! July’s employment report was stellar by almost any measure; you have to go back to the 1980s to see job growth numbers of this magnitude. The US added 943,000 jobs in July on top of the 938,000 added in the previous month. The unemployment rate fell to 5.4%, down from 5.9% last month. We were pleased to see that many returning workers were previously classified as long-term unemployed, which historically have been the most difficult to bring back into the labor force. Wages increased during the month at a 4% annual rate, which was incredible considering that many job gains have been in traditionally lower-wage industries.
Business and consumer demand are pushing economic growth to levels not seen since the post-World War 2 period. GDP growth in the second quarter clocked in at 6.5% after a 6.3% print during the first quarter of the year. As strong as this number is, growth was severely constrained by lingering supply chain issues. Both ISM surveys noted record-low inventory levels providing continued demand as businesses replenish stocks to sustainable levels. In July, inventory shortages from supply chain issues dampened the ISM Manufacturing index, which fell to 59.5 from 61 the previous month. The ISM Services index, much less dependent on foreign supply chains, surged to 64.1%, a record for the series, as the service economy fully reopens. Both series pointed to record-level demand and an improving labor market.
Of course, the resurgence in COVID cases is a concern, but we expect the latest wave to follow the two-month pattern seen in the United Kingdom. In our view, inflation remains our primary risk to a stable longer-term growth path for the economy. We saw higher than expected CPI prints in March through July, surprising even central bank officials. Recent Federal Reserve comments have sounded less confident about the transitory nature of the increases, only adding to our angst. While our concern goes up with every additional month of data, most of the outsized gains still appear to be related to sectors affected by supply chain issues or are in previously depressed areas of the economy. We are also watching income growth for any signs of a wage-price spiral which could change consumer’s expectations of future inflation. This happened most dramatically during the 1970s as workers demanded cost-of-living adjustments to offset the effects of ever-higher prices. If US Treasury rates are any indication, the market is not the least bit concerned about the recent inflation numbers. Our call continues to be for a return to a more reasonable 2.5% – 3% inflation regime which is in the sweet spot to generate sustainable growth.
Bottom Line: Economic growth has surprised even the most bullish of economic forecasters. We believe above-trend growth will continue at least through the remainder of the year, given the level of demand at both the consumer and business levels. Labor markets will continue to improve over the coming months as the jobs available in the market far exceed job seekers. We continue to watch inflation indicators for any signs of a sustained breakout. Our current call is for a healthy 2.5%-3% inflation level over the longer term.