U.S. job growth slows. Could this impact the Fed’s tapering plans?

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Senior Client Investment Analyst Chris Kyle unpacked the numbers from the August U.S. jobs report. They also discussed recent PMI (purchasing managers’ index) data from Europe and China as well as the latest developments around the potential US$3.5 trillion U.S. budget bill.

U.S. nonfarm payrolls fall far short of expectations, August report shows

The U.S. employment report for August, released on Sept. 3 by the Labor Department, showed that the economy added 235,000 nonfarm payrolls last month—a number Eitelman characterized as disappointing. “Consensus expectations were for around 720,000 new jobs, so this was a pretty clear miss,” he stated, noting that the weakness was most pronounced in state and local government education and in the leisure and hospitality sector.

Jobs in public education fell by 27,000 during August, Eitelman said, defying widespread expectations for a significant gain. However, the decline in hiring is probably more noise than signal, he said, noting that the data was messy and hard to interpret. The leisure and hospitality sector, meanwhile, added zero net new jobs during August, Eitelman said—a big stall after averaging 350,000 job gains a month over the past six months.

“This sector is one of the most vulnerable to COVID-19, and the steep ramp-up in infections caused by the delta variant definitely impacted hiring here,” Eitelman said, explaining that many leisure and hospitality businesses are highly dependent on in-person activities.

Despite the weakness in the August numbers, the overall U.S. economic recovery appears to be continuing at a fairly healthy pace, he said, noting that job openings remain elevated—indicative of a strong hiring demand from employers. Amid this demand, there are some signs that wage pressures are also mounting, Eitelman said, pointing out that monthly wages climbed 0.6% from July.

As to whether or not the jobs report could derail the U.S. Federal Reserve (the Fed)’s plans to begin tapering monthly asset purchases later this year, Eitelman said he believes that’s unlikely. “I don’t think the August numbers are weak enough to significantly alter the Fed’s plans—and I continue to expect that the central bank will make an announcement on tapering later this year,” he concluded.

Eurozone composite PMI stays high, China services sector contracts

Turning to other key economic data highlights from around the world, Eitelman noted that IHS Markit’s composite PMI for the eurozone only fell slightly during August, dipping to a reading of 59 versus 60 in July. Numbers above 50 indicate expansionary conditions, while numbers below 50 indicate contractionary conditions. “A reading of 59 is still a signal of strength, and is reflective of very robust economic growth conditions,” he explained.

Eitelman said that some other European economic indicators came in softer in August, particularly eurozone retail sales, which declined by 2.3% from July. However, some of the downturn can probably be attributed to the severe flooding experienced in Germany last month, which likely hindered consumers’ ability to spend, he stated. “Overall, I believe that the European recovery is still looking pretty good, particularly as 2022 approaches, with plenty of fiscal stimulus in place to invigorate growth over the next few years,” Eitelman remarked.

Shifting to China, he said that recent economic data has been more negative, with the country’s August PMI reading for the services sector dropping to a level of 47.5. However, Eitelman pointed out that the slowdown in growth isn’t too surprising in light of China’s recent COVID-19 outbreak. “China has a very strict, zero-tolerance policy when it comes to combating the virus, and this led to the imposition of government-mandated restrictions on mobility last month in an effort to control the outbreak,” he explained. With the flare-up in infections now largely under control, Eitelman said he believes Chinese policymakers are likely to add more stimulus to stabilize the country’s growth. This may include a potential cut in the reserve requirement ratio for banks or a cut in the one-year loan prime rate, he stated. Eitelman added that for investors, China’s ongoing regulatory clampdown remains a key watchpoint in the months ahead.

Tax implications loom large for investors amid proposed U.S. spending bill

Eitelman and Kyle wrapped up the segment with a look at the latest updates pertaining to the proposed US$3.5 trillion budget reconciliation bill in the U.S. Senate. On Sept. 2, Democratic Senator Joe Manchin of West Virginia called for a strategic pause in the consideration of the spending plan. This is a critical development, Eitelman said, because the bill—which is central to advancing President Joe Biden’s economic agenda—needs the backing of all 50 Democrats in the Senate in order to be passed.

“The odds of the spending measure failing in the Senate have probably increased to about 50-50,” he stated, noting that a month ago, betting markets were placing a 70% probability on the reconciliation bill’s successful passage. The fate of the bill remains very murky, Eitelman said, adding that Democrats have also proposed taxing stock buybacks as a way to pay for the plan.

“Ultimately, the status of this bill continues to be a very important watchpoint for financial markets in light of the potential tax increases it may bring,” he concluded, stressing that amid this backdrop, tax-aware investment strategies will likely become very important in the weeks ahead.

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