The job market
Economists predict that 3.5 million jobs will be added this year, with a high of more than one million in September. Employers added 943,000 jobs in July, exceeding the 845,000 Dow Jones estimate.
The unemployment rate fell to a lower-than-expected 5.4 percent in July, and Goldman economists now expect it to improve slightly more this year than they previously predicted.
They predict a year-end rate of 3.5 percent in 2022, noting that this is the 50-year low reached before the pandemic and the level that Federal Reserve officials consider to be full employment.
Goldman’s forecast for unemployment improvement is more aggressive than the central bank’s forecast of 4.8 percent this year and 3.8 percent next year. The Fed does not expect unemployment to return to 3.5 percent until 2023, the year that central bank officials plan to raise interest rates for the first time.
The Goldman economists wrote, “We expect monthly job gains to remain strong for the rest of the year.”
“Labor demand remains very hot,” they said, adding that “further reopening and the expiration of federal unemployment benefits should boost hiring in virus-sensitive and low-paid service industries, the return of in-person school should bring back education jobs, and seasonality distortions look likely to remain positive.”
According to the Labor Department’s Jobs Openings and Labor Turnover Survey, which was released on Monday, there were 10.1 million open positions in June, a new high.
According to Goldman economists, the elimination of federal enhanced unemployment benefits will be one factor that should boost hiring. Approximately half of the states in the United States have already stopped making these payments, which are set to expire in September.
“These remaining states account for more than three times as many benefit claimants as the early expiration states, implying that the majority of the impact of expiration has yet to be felt,” the Goldman economists wrote. They anticipate a 400,000-job increase in September simply due to the end of benefits.
Aside from unemployment benefits, economists believe productivity gains and a still-low level of business demand may be influencing hiring. They also stated that production and non-supervisory employment are still down by about 9% in industries where the average weekly wage is less than the level of unemployment benefits combined with enhanced payments.
In July, average hourly wages increased by 4% year on year.
“Wage growth should moderate in the coming months as federal unemployment insurance benefits expire, increasing effective labor supply,” the economists wrote. “However, we expect wage growth to reaccelerate to 3.5 percent to 4 percent in the coming years, a rate consistent with unit labor costs and consumer prices rising at roughly the Fed’s 2 percent target.” Labor force participation, or the percentage of the population working, should also improve. According to Goldman economists, it will increase by 0.6 percentage points to 62.3 percent by the end of the year, but the participation rate will peak at 62.4 percent at the end of 2022. According to the economists, this represents a 0.9 percentage point difference from the pre-pandemic level due to population aging and early retirements.
According to economists, the Fed is on track to signal about tapering back its bond purchases — that is, its $120 billion monthly purchases of Treasurys and mortgage-backed securities — at its September meeting, and then formally announce it in December. Policy makers enacted the bond-buying program to provide liquidity to the market as the economy grappled with the pandemic.
Goldman also believes there is a 25% chance the Fed will announce its intention to reduce bond purchases as soon as November.
Will the delta wave peak?
“This is the biggest wave we could see this year, and if it peaks, we’re going to have a big everything rally,” said the co-founder of Fundstrat Global Advisors, who has become a closely watched strategist during the Covid crisis after making some timely market calls. Fundstrat’s research team has also expanded its services to include coronavirus data analysis in client emails.
Even though the Dow and S&P500 closed at all-time highs on Friday, Lee said investors are still juggling a number of somewhat contradictory inputs, including strong second-quarter earnings results combined with global uncertainty surrounding Covid, vaccine rollout, and the implications for the economic recovery.
“There are so many things looming over the outlook that I believe investors would have sold the news on Q2,” Lee said.
“Clients are so concerned about the delta variant that they won’t believe it until they see it,” Lee said, referring to a decrease in cases in the United States. However, he added, “I think if Covid is retreating in the US and we don’t have a fall wave, we’re going to have a really big risk rally.” He cited bitcoin’s recent performance, including a roughly 5% rise Monday that brought the cryptocurrency to its highest levels since mid-May, as “strong evidence of this everything rally.”