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The Payroll Numbers Won’t Prevent Economic Growth From Softening

Employment was the big story of the week with headline Payroll Employment rising +943K Seasonally Adjusted (SA). The consensus estimate was +870K, so, apparently, a big beat. But, looking beneath the surface reveals that this isn’t quite what, at first blush, it appears to be.

Since the pandemic began, we have held the view that the Not Seasonally Adjusted (NSA) data present a truer picture than do the SA. The pandemic’s distortions haven’t been in the data long enough to show any seasonality, and we don’t expect those distortions to have seasonality in the first place. (Example: Do the mutations occur in a seasonal pattern?)

The NSA Payroll number was -133K. Yes, with a negative sign. That’s over a one million difference. That doesn’t mean the payroll number was weak, because it is normal for July to show about a -1 million NSA number. Nevertheless, the distribution of the newly created jobs paints a not-so-rosy picture. Nearly 60% of the gain in jobs were in leisure/hospitality (+327K SA), government education (+221K SA), and private education (+40K SA). Since these sectors have been particularly hard hit by the pandemic, it is hard to say what the numbers mean. The NSA (raw) number for government education (the +221K number) was -901K, and, for private education, it was -45K. These numbers are not what they first appear to be, and it makes interpretation quite difficult. Here are BLS’ accompanying comments:

“Staffing fluctuations in education due to the pandemic have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in July. Without the typical seasonal employment increases earlier, there were fewer layoffs at the end of the school year, resulting in job gains after seasonal adjustment. These variations make it more challenging to discern the current employment trends in these education industries. Since February 2020, employment is down by 205,000 in local government education and 207,000 in private education.”

Initial and Continuing Claims

The weekly employment data also showed improving but confusing patterns. Initial Unemployment Claims (ICs) (state and PUA (Pandemic Unemployment Assistance) programs) fell -20K from 438K to 418K.  The PUA programs, which were meant for self-employed and Gig workers, end in early September. So, like those on the opt-in state programs (the ones still paying the federal $300/week unemployment supplement), there will be an incentive for these folks to either reopen their businesses or find employment elsewhere. Excluding PUA, the state programs are down to 324K (having been as high as 6.2 million in April 2020). The pre-pandemic “normal” was 200K, so state ICs (i.e., new layoffs) are closing in on “normal.”

State Continuing Unemployment Claims (CCs) (those collecting the benefits for more than one week) are also making headway (see the chart at the top of this blog). Again, this is what we should expect in an economy that is reopening. The table shows that over the 10 weeks from May 15 to July 24, in opt-out states (those 24 states no longer paying the federal supplemental $300/week benefits), CCs decreased by -27% while in the opt-ins, they fell by -15%.

The bottom line of the table excludes CA from the calculations. CCs there increased by a whopping +239K between June 26 and July 17, then decreased -256K the week of July 24. No explanation has been tendered. Excluding CA, the opt-in states are beginning to show significant decreases (-20%) as we have been predicting they would as the time to expiration of the federal supplement approached. In total, over the 10 weeks, state CCs have fallen by -665K (18.8%) and now stand at 2.88 million. The pre-pandemic normal for state CCs is 2 million, so there has been some headway here.

Pandemic Unemployment Assistance

The above discussion included only state CC programs because that is where we could measure the disincentives caused by the extended federal $300/week unemployment supplement. But, as we have alluded to in prior blogs, the total number of folks on some sort of unemployment benefit is still near 13 million. Of those 13 million, 9.4 million are in the PUA programs which are scheduled to end in early September.

  • When PUA ends, we expect that many of the current record number of job openings will get filled.
  • Unless Congress authorizes PUA extensions, the sudden cessation of the payments is likely to have a negative impact on consumption, at least until most of those on benefits find employment. 

Other Data

Despite Friday’s (August 6) employment report, we are still of the view that Q3 and Q4 U.S. GDP growth will disappoint. The consensus estimate for Q3 growth is +7%, and it is +5% for Q4. The data, however, are trending down, not up – Q2 GDP growth was 6.5% – so, slower means a number lower than that. 

  • June Construction Expenditures grew +0.1% M/M on a nominal dollar basis. When adjusting for inflation, they were -0.6%. Residential construction is up, and it appears that the U.S. has a significant housing “shortage” after preferences dramatically changed during the pandemic for more space and more suburban living. Hence, the housing price spike. Non-Residential construction (building and plant) fell -0.9% M/M in June. They were -6.6% Y/Y and are down five months in a row. These continue to be recessionary numbers.
  • Mortgage applications for purchase are down -22% since year’s end, with July’s level back to the May 2020 pandemic low. 
  • The three-month trend in New Home Sales is -64% (annual rate); and Building Permits are off -32%. As discussed in our last blog, the University of Michigan’s July Consumer Sentiment Survey put home buying intentions at a 40-year low.
  • Auto sales, too, are tanking (you can place the blame on semiconductors, but that doesn’t matter – sales are sales). M/M sales look like this: May: -7.5%; June -9.9%; July -4.5%. At a 14.7 million annual rate, auto sales are the lowest since July 2020, near the recession’s bottom. U of M’s survey last month also showed auto buying intentions in the tank (Same for major appliances!)
  • We also note that in Friday’s (August 6) employment report, the Retail Sector both lost jobs (-5.5K) and showed a reduced workweek.


Despite the media hype on wages, real average hourly earnings fell -1.7% Y/Y in June. Combined with a +0.3% increase in the average workweek, the result is a -1.4% Y/Y decrease in real average weekly earnings. Our past blogs have referred to the Atlanta’s Fed’s Wage Tracker which has been telling the same story, i.e., the aggregate data do not show any significant wage inflation.

Above, we mentioned that housing appears to be in short supply. We think this condition will persist due to changes in housing preferences, the long construction lead time, and the huge disincentive caused by the rapidly rising home prices. While we still believe that most of the current increase in consumer prices (i.e., inflation), is “transient,” because of the newly minted housing “shortage,” we think “rents” may be an exception, and that we may see some persistency in “rent” inflation. The year-long eviction moratorium and suppression of rent payments is another tail wind for such an outcome, as landlords have borne a disproportionate economic burden. And now, the “eviction” moratorium has once again been extended by the Biden Administration despite a Supreme Court decision to the contrary. So, there is going to be significant upward pressure on rents which will accelerate when the moratoriums are eventually removed.

The Pandemic

The reemergence of infections and hospitalizations is another factor contributing to our softer growth view:

  • China has imposed travel restrictions due to the rapidly spreading Delta-Variant.
  • Japan, despite hosting the Olympics, has declared a quasi-state of emergency in eight prefectures.
  • Thailand has record new daily cases, and India’s counts are rising again.
  • In Australia, Melbourne has locked down again (for the 6th time) and Sydney is reporting record case counts.
  • The accompanying map (shown in last week’s blog) shows where cases are rising in the U.S. Florida is now showing the most hospitalizations due to Covid since the pandemic began.

The pandemic is not over, and rising infections and hospitalizations can only have a negative impact on economic growth. The virus has continued to mutate, and there is the possibility that a vaccine defiant mutant could appear. The virus is still playing havoc with the world’s economies, including our own.

Interest Rates

  • In the aftermath of the August 6 Payroll Report, yields backed up dramatically (the 10-Year T-Note backed up 8 basis points from 1.22% to 1.30%, a very large move for this market). Part of the reason was that the Payroll Report is mounting pressure on the Fed to start its “taper” (reduction of its $120 billion/month purchases of Treasuries and Mortgage Backed Securities) sooner rather than later, and the market also moved up its view to 2022 as to when the first rate hike would occur (was 2023).
  • Our view still is that the softer growth that lies ahead will lead to lower rates before this year ends. But that doesn’t preclude the 10-Year T-Note rate playing in the 1.30% to 1.50% range until more signs of softness appear.


  • Strong payroll numbers are expected and should continue, especially as the federal unemployment supplement and PUA programs end.
  • Economic growth, however, will soften because, for many on state programs, a return to work is a wash as far as cash flow is concerned. And for those 9.4 million on PUA, checks are scheduled to end in early September in the absence of additional Congressional action.
  • The most recent data for Housing, Autos, and Retail Sales are soft.
  • While there are plenty of anecdotal stories, wage inflation has still not shown up in the aggregated data.
  • In general, we still think that most consumer inflation will be “transient,” but, because of the shift in housing preferences along with rising home prices and the continuation of the eviction moratoriums, there is likely to be some “persistency” in rent inflation going forward.
  • The pandemic isn’t over, and we think it will continue to have a depressing effect on economic (consumer) activity.

(Joshua Barone contributed to this blog.)

Robert Barone, Ph.D. is a Georgetown educated economist. He is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (NYSE Symbol: FFIU). Robert is also a financial advisor at Four Star Wealth Advisors. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, a Director and Chairman of the Federal Home Loan Bank of San Francisco, and. similarly, a Director and Chairman of the CSAA Insurance Company (the AAA brand). Robert currently is a Director of the AAA Auto Club of Northern California, Nevada, and Utah, and a Director of Allied Mineral Products (Columbus, OH), America’s leading refractory company


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