In a Nutshell: Strong Jobs Report Despite Trouble Finding Workers

By Ken Herman

"By June COVID numbers were so low most of the economy could fully reopen, if only companies could find the workers necessary to do so.  Growing pains will be inevitable."

On July 2nd The Street received the jobs data for the month of June, and those numbers did not disappoint. The Labor Department announced that job growth accelerated in June (to 850,000); however, the unemployment rate was unchanged as uncounted people reentered the workforce.  The overall tone of the report was consistent with rapid reopening, as well as continuing growing pains.

Another big story shining through this report was the remarkable number of people vaccinated against COVID during the second quarter.  In early April we worried about a fourth COVID wave and possible widespread new shutdowns.  By June COVID numbers were so low most of the economy could fully reopen, if only companies could find the workers necessary to do so.  Growing pains will be inevitable.

This jobs report was consistent with robust recovery, including capacity problems in manufacturing and isolated wage pressures in short-handed industries.  While leisure and hospitality hiring accelerated, the newspapers and industry surveys are still full of employers complaining about a worker shortage. This confirms how quickly the economy is reopening as growing pains persist.  There is plenty of evidence in this report of bottlenecks, but also some evidence that they are easing and wage pressures resulting from labor shortages are not yet big enough to affect (Fed) monetary policy.

This will be a year of almost-unprecedented peacetime GDP growth.  Not since the opening years of the Korean War has America seen what we will likely see in 2021 – 7% or greater Gross Domestic Product (GDP) growth.  As we enter the second half of 2021, the Atlanta Federal Reserve says the current quarterly GDP growth is humming along at an annual rate of 10.3%, and it shows no signs of slowing.  If we could just keep the supply chains going, we might see record-high growth rates.

However, many of my Wall Street colleagues are quite worried at the moment, very sensitive and concerned about the latest $6 trillion budget for FY 2022.  Many have voiced concern that we are funding our own destruction.  During the 12 months ending March 31, federal outlays were $7.6 trillion, while receipts were only $3.5t., creating a one-year deficit of $4.1trillion!

This current administration has an appetite for spending, with little clarity on how to pay for all that spending.  Significantly raising taxes will cause people to respond, probably in ways that are not beneficial for ongoing economic growth.  Punish something and you get less of it.  Reward something (like paying people more not to work) and you get more of it.  Raise taxes and people may also work less. It’s simple logic, but many politicians don’t get it.

More big news last week (after the Labor Dept announcement) was that the 10-year Treasury bond yield fell below 1.45%.  Falling Treasury bond yields amid rising inflation is considered counterintuitive by many market observers.  However, consider that 10-year government bond yields are negative in Germany, on top of record low corporate bond yields here in the U.S. which are supported by record corporate earnings.  In other European nations, 10-year government bonds are 0.43% in Spain and 0.85% in Italy, even though Spain’s deficit as a percentage of GDP was 10.97% in 2020, and Italy’s deficit came in at 9.47% of GDP. 

Amidst such high budget deficits and record low bond yields, it’s understandable that U.S. corporate bond yields are falling.  A corporation with robust earnings growth is deemed safer by many investors than some (or most?) government debt.  But, why is there not more concern about significant inflation, as well as the related lower (future) purchasing power of all currencies?

I cannot stress how bullish this current low interest rate environment is for stocks and other tangible assets. Not only are many companies selling debt at ultra-low yields to pay off their higher yielding debt, but many companies are also bolstering their cash reserves and boosting their stock buy-back activity.  Could the current low interest rate environment be helping to set the stage for another market surge when second-quarter results are announced in late July?