The August Employment Report and Fed Tapering

The stock market's rally should not be dented by this week's August Employment Report, even if it as strong as consensus expects.  This is because a strong Report may not be enough to trigger a Fed decision to start tapering.  In contrast, a soft Employment Report could push the market's view of the start of tapering into next year.

Both Fed Chair Powell and Fed Vice Chair Clarida highlighted the need to see further progress in labor market improvement, particularly a significant decline in the Unemployment Rate -- which is not likely to be fully realized in the August Employment Report.  The Rate has a long way to fall before reaching pre-pandemic levels.  The Total as well as almost all its sub-components were about 2 percentage points above these earlier levels in July.  It could take several months to make a sufficient dent in this spread to warrant saying "substantial progress has been made."  That may be why Powell and Clarida both seemed to indicate a late-Q421 start to tapering. 

Consensus looks for +728k m/m Nonfarm Payrolls, a strong gain even though less than the +943k in July.  Some evidence supports the idea of an even larger gain than July's.  /1/ The Claims data argue for a speedup, as Continuing Claims fell much more sharply between July and August than between June and July.  /2/ State & Local Education jobs could jump even more than in July as the school year began in parts of the country.  

But, there is other evidence suggesting a smaller gain in August than in July.  /1/ The Claims data missed the speedup in July Payrolls, so they may not be a reliable indicator in August.  August Payrolls could see payback for the surge in July Payrolls, making the 2-month change more consistent with the Claims data.  /2/ In 5 of 7 months so far this year, Payrolls sped up when the ADP Estimate was larger than the (first-print) Payroll print in the prior month and slowed when the ADP Estimate was smaller than the Payroll print in the prior month.  ADP was 330k in July while Private Payrolls was 703k.  If the relationship holds, August Payrolls should slow relative to July.  Consensus for August Private Payrolls is +610k, consistent with this evidence.

Consensus expects the Civilian Unemployment Rate to fall to 5.2% from 5.4%.  The Insured Unemployment Rate, calculated from the Claims data, supports this estimate.  The Insured rate fell 0.3 percentage point between the July and August Employment Survey Weeks.  This is only suggestive, however, since there is no exact relationship between the Insured and Civilian Unemployment Rates (see table below).  One reason for the inexactness is that the Civilian Rate is based in part on the Labor Force while the Insured Rate is not.  Note that even if the consensus estimate is correct, the Civilian Unemployment Rate still would be well above its pre-pandemic low of 3.5%.

                         Level in Survey Week (percent)
    Insured Unemployment Rate            Civilian Unemployment Rate 

Jan21          3.4                                            6.3
Feb             3.1                                            6.2
Mar            2.7                                            6.0
Apr             2.6                                           6.1
May            2.6                                           5.8
June            2.5                                           5.9
July            2.4                                           5.4
Aug            2.1                                           na        

Consensus also looks for a dip in the Mfg ISM -- the other key data this week -- to 58.5 in August from 59.5 in July.  Most other mfg surveys fell in August, although some could be catch-up after missing the decline in the July Mfg ISM.  A near-consensus print would still be a strong level, but the pullback could underscore problems in the supply chain.  A modest decline would not likely be enough to dissuade the Fed from beginning tapering later this year.