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A sharp slowdown in US employment growth rules out the possibility that the US Federal Reserve will announce plans this month to take back its pandemic-era incentives, economists say, as the spread of the delta coronavirus variant tarnishes the economic outlook.
After very strong payroll reports in June and July, the US Federal Reserve prepared this year to cut its monthly purchase program to $ 120 billion in peak employment and an average of 2 percent inflation.
These gains, coupled with soaring US consumer prices, which pushed inflation to its highest level in 13 years, prompted several regional Fed presidents to announce an immediate adjustment as early as September’s monetary policy meeting.
But the shockingly weak August payroll report, which created just 235,000 jobs last month, compared to 1.1 million in July, turned that schedule on its head and made the Fed more cautious in its exit from financial markets .
“It felt like we were going in the right direction on the job market [but] This slower pace of job creation and the fact that the delta option remains a major downside risk is likely to favor a patient approach, ”said Lydia Boussour, senior US economist at Oxford Economics.
“It rules out an announcement in September that a reduction in asset purchases will begin,” added Joseph Song, chief US economist at Bank of America. “The key question going forward is whether it will be a one-off pressure or whether we will continue to see a slowdown.”
While the unemployment rate fell to 5.2 percent in August from 5.4 percent in the previous month, the delta variant dealt a serious blow to a number of important sectors that finally began to recover in the course of a nationwide vaccination campaign.
The leisure and hospitality industry saw no job gains for the month – a sharp decline given the average monthly increase of 350,000 jobs over the past six months, according to the Bureau of Labor Statistics.
Retailers and restaurants have also had to make cuts, with cumulative job losses of around 70,000, and more Americans reported last month that they couldn’t work because their employer closed or lost stores due to the pandemic. That measure rose to 5.6 million in August, up from 5.2 million in July.
Until Friday’s report, the economic burden of the Delta variant was not yet apparent. Jay Powell, Fed chairman, suggested in late July that the current wave could have a more subdued economic effect, but the magnitude of the labor market setback last month casts doubt on that view.
“To date, we’ve seen central banks generally go through the delta variant [and] it hasn’t put them off their political path, ”said Ellen Gaske, chief economist at PGIM Fixed Income. “But the slower data is coming in slowly and the Fed may be more cautious here and pause.”
Despite the slim chance of a move in September, most economists and investors still expect the central bank to announce its intention to withdraw its support sometime this year.
At the Jackson Hole Symposium last month, Powell said the inflation mark had been reached to slow the central bank’s bond purchases and that there had been “clear progress” in the labor market. He was also optimistic that many of the factors preventing workers from filling a record number of jobs – including the lack of childcare and improved unemployment benefits – “are likely to pale”.
The August job data contained new evidence that labor shortages are still a major drag on hiring and employers need to raise wages to attract new employees. Average hourly wages rose 0.6 percent from July, up 4.3 percent year-over-year – an increase, said Simona Mocuta, senior economist at State Street Global Advisors, underscoring the impact of supply shortages on employment growth .
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“There is a huge conflict and contradiction here when you have an economy with more than 5 million fewer employees than before Covid, but you have record jobs,” she said. “There is clearly friction and no one knows how long it will last.”
The sharp acceleration in wages and the prospect of driving headline inflation even higher could also provide fodder to officials worried about increased price pressures and advocating withdrawal of monetary support, Evercore ISI’s Peter Williams warned. He now expects sharper divisions in the Fed on the economic outlook.
The debate now revolves around whether the Fed is confident enough in the face of the labor market recovery to announce a cut at its November meeting when there is only one job report left to analyze. Constance Hunter, chief economist at KPMG, said a December announcement was more likely at a time of such extreme uncertainty, while others warn that the cut announcement could be postponed until next year.
“Neither of us knows for sure whether this number is the start of a new trend or a slip,” added Paul Ashworth, chief US economist at Capital Economics. “All you can do is wait.”