WASHINGTON (Reuters) – U.S. employment growth likely pulled back in August after gaining nearly 2 million jobs in the past two months as soaring COVID-19 cases reduced demand for travel and entertainment, but the pace was probably enough to sustain the economic expansion.

FILE PHOTO: A sign advertising job openings is seen while people walk into the store in New York City, New York, U.S., August 6, 2021. REUTERS/Eduardo Munoz

The Labor Department’s closely watched employment report on Friday would come as economists have been sharply marking down their gross domestic product estimates for the third quarter. Reasons cited include the resurgence in infections, driven by the Delta variant of the coronavirus, and relentless shortages of raw materials, which are depressing automobile sales and restocking.

Surging COVID-19 cases could also have kept some unemployed people home, frustrating efforts by employers to boost hiring.

“The Delta variant is like a sandstorm in an otherwise sunny economy,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “If it weren’t for that, employment in August would have been even higher.”

According to a Reuters survey of economists nonfarm payrolls likely increased by 750,000 jobs last month. The economy created 1.881 million jobs in June and July. Should job growth in August meet expectations, that would leave the level of employment about 5 million jobs below its peak in February 2020.

But the forecast is highly uncertain, with estimates ranging from 375,000 to 1.027 million.

High frequency indicators have suggested a softening in demand for air travel, hotel accommodation and in-person dining, which some economists expect led to a moderation in leisure and hospitality job growth.

Reports this week showed a measure of factory employment contracting and private payrolls undershooting expectations. But hiring by small businesses accelerated and consumers’ views of the labor market remained fairly upbeat.

Over the last several years, including in 2020, the initial August payrolls print has undershot expectations and been slower than the three-month average job growth through July.

“COVID effects may make this comparison to the trend less useful, however, August payrolls have been revised higher with the subsequent two jobs reports in 11 of the last 12 years, including last year,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

Friday’s report will be crucial for financial markets as investors try to gauge the timing of the Federal Reserve’s announcement on when it will start scaling back its massive monthly bond buying program.

Fed Chair Jerome Powell last week affirmed the ongoing economic recovery, but offered no signal on when the U.S. central bank plans to cut its asset purchases beyond saying it could be “this year.”

Jim O’Sullivan, chief U.S. Macro Strategist at TD Securities in New York, who is forecasting a 400,000 rise in payrolls in August, does not believe this would be weak enough for the Fed to back away from their “this year” signal.

“But it would probably increase the probability of a formal announcement coming at the December rather than the November meeting,” said O’Sullivan. “We certainly don’t expect an announcement at this month’s meeting, even if the August data are stronger than expected.”

Graphic: What impact will Delta have on jobs?:

SUPPLY CONSTRAINTS BITE

Despite the flare-up in COVID-19 cases, the leisure and hospitality sector likely accounted for a big chunk of payroll gains last month. Some economists expect the hit to restaurant and bars would be in the form of reduced hours.

Government employment likely increased solidly as schools reopened for in-person learning, though the pace slowed from July’s whopping 240,000 jobs.

Manufacturing payrolls are expected to have advanced by 25,000 jobs last month. Factory hiring is being constrained by input shortages, especially semiconductors, which have depressed motor vehicle production and sales.

Raw material shortages have also made it harder for businesses to replenish inventories.

Motor vehicle sales tumbled 10.7% in August, prompting economists at Goldman Sachs and JPMorgan to slash third-quarter GDP growth estimates to as low as a 3.5% annualized rate from as high as 8.25%.

“At some point production should pick up, allowing for the restocking of inventories and supporting sales, but it is unclear exactly when this will occur,” said Daniel Silver, an economist at JPMorgan in New York. “The recent spread of the Delta variant and persistence of broader supply chain issues has generated some downside risk to the near-term outlook.”

The economy grew at a 6.6% rate in the second quarter.

The unemployment rate is expected to have declined to 5.2% in August from 5.4% in July. It has, however, been understated by people misclassifying themselves as “employed but absent from work.”

The pandemic has upended labor market dynamics, creating worker shortages even as 8.7 million people are officially unemployed. There were a record 10.1 million job openings at the end of June. Lack of affordable childcare, fears of contracting the coronavirus, generous unemployment benefits funded by the federal government as well as pandemic-related retirements and career changes have been blamed.

There is cautious optimism the labor pool will increase because of schools reopening and government-funded benefits expiring on Monday. But the Delta variant likely delayed the return to the labor force for some.

“While we believe the trend in labor force participation is higher due to reopening and mass vaccination, we expect a pause in August due to concerns around the Delta variant,” said Spencer Hill, an economist at Goldman Sachs in New York.

With labor scarce, average hourly earnings likely increased 0.3% after rising 0.4% in July. That would keep the annual increase in wages at 4% in August.

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