Goodbye taper. Hello inflation.
Stocks opened lower this morning after a downright grim August jobs report was revealed pre-market. ADP predicted a paltry 374,000 job gain (vs. 638,000 expected) with its August private payroll data, released Wednesday.
And though ADP underestimated the Bureau of Labor Statistics’ (BLS) official tally five out of the last seven months, this time around, the data analysis firm actually overshot the real jobs report total.
Only 235,000 jobs were added last month according to the BLS, falling well short of the 725,000-payroll consensus estimate. It was the weakest jobs report since January and represented a massive drop in hiring compared to July’s upwardly-revised gain of 1 million jobs.
Both Wall Street and the mainstream financial media were quick to blame the Delta variant for the major nonfarm payrolls “miss.” Most surprising of all was that no jobs were added in the leisure and hospitality category, which most analysts assumed would see a continued bounce back following the industry’s impressive hiring blitz in July.
And though the Delta variant may have impacted the August jobs data in some capacity, two much larger issues likely had a far greater influence:
A slowing US economy, coupled with a full-blown labor shortage.
Small businesses are still struggling to find help amid strong unemployment programs and a consistent stream of government stimulus, the latter of which has finally tailed off. Businesses with less than 50 employees have lagged larger companies in terms of hiring for months. If nothing changes, this trend could only intensify heading into Q4 if the economy slows.
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Wall Street banks are also coming around to the idea that US GDP growth will decelerate in Q3. Just yesterday, Morgan Stanley revised its Q3 GDP growth projection to just 2.9%, down from its original 6.5% quarterly estimate. Morgan Stanley joins Goldman Sachs, which shocked investors with its own downward Q3 GDP revision from 8.5% to 5.5% two weeks ago.
In the grand scheme of things, Delta hasn’t really dented the US economy. Most states remain fully open, which has allowed businesses to operate unimpeded.
What has changed, however, is inflation. Surging input costs skewered earnings for American manufacturers last quarter. Consumer sentiment has plunged, too, while inflation expectations skyrocketed.
This is the kind of thing that can be solved by fighting inflation head-on through tapering and the raising of rates.
But following the release of a disastrous August jobs report, the Fed’s initial plan of attack may no longer apply.
“A surprisingly low jobs number this morning clouds the tapering outlook considerably as only 235k jobs were added in August, likely giving the Fed pause and pushing out their plans to announce their bond taper plans,” explained Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note.
“Many people believed that the Fed would announce their taper plans at this month’s FOMC meeting and that is no longer likely.”
We suggested over the last few days that a bad jobs report would be met with some selling from investors. Throughout most of the pandemic, that wasn’t the case. Bad news was good news, as it allowed the Fed to keep monetary policy dovish.
Now, though, bad news is most certainly bad news, simply because the Fed is running out of time. Back in June, we warned that the US could be headed for a “stagflationary” collapse (stagnating demand, high inflation) by year’s end.
The August jobs report may have just sealed the economy’s fate in that regard if the Fed uses it as an excuse to delay a much-needed taper.