US job growth seen accelerating after Delta slowdown

U.S. job growth likely accelerated in September as the summer wave of COVID-19 infections began to subside, fueling demand for high-contact services like dining out, and positioning the Federal Reserve to start scaling back its monthly bond buying.

The Labor Department’s closely watched employment report on Friday would also suggest that an apparent sharp slowdown in economic activity in the third quarter was probably temporary. Still, the labor market and broader economy remain constrained by worker and raw material shortages, wrought by the pandemic.

“With COVID clearly on a downward path again, I think the jobs report should be pretty good,” said James Knightley, chief international economist at ING in New York. “But there are still clearly strains in the job market, in that the labor supply story remains very constrained.”

According to a Reuters survey of economists, non-farm payrolls likely surged by 500,000 jobs last month, which would leave the level of employment about 4.8 million jobs below its peak in February 2020.

Estimates range from as high as 700,000 jobs to as low as 250,000. The economy added 235,000 jobs in August, the fewest in seven months, with hiring in the leisure and hospitality industry stalling. Apart from the Delta variant, a seasonal quirk was also a drag, and economists expect August payrolls will be revised higher in keeping with the trend in past years.

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COVID-19 infections are decreasing in the United States, with 100,815 new infections reported on average each day, according to Reuters analysis of data from state and local governments, as well as health authorities.

September’s employment report is the only one available before the Fed’s Nov. 2-3 policy meeting. The U.S. central bank signaled last month that it could start tapering its monthly bond buying as soon as November.

Fed Chair Jerome Powell told reporters that “it would take a reasonably good employment report” to meet the central bank’s threshold for reducing its massive bond buying program.

Economists expect that criteria will be met in the September report, which is also expected to show the unemployment rate falling to 5.1% from 5.2% in August.

The likelihood of a taper was bolstered by the U.S. Senate taking a step on Thursday to raise the Treasury Department’s borrowing authority until December.

“Virtually any payroll gain in excess of August’s 235,000 increase would check this particular box for the Fed,” said Lou Crandall, chief economist at Wrightson ICAP in New York.

SPEED BUMP

Labor market indicators were mixed in September. The ADP National employment report on Wednesday showed stronger-than-expected private payrolls growth last month. The number of people on state unemployment rolls decreased between mid-August and mid-September.

But a survey from the Conference Board last week showed consumers’ views of current labor market conditions softened. While the Institute for Supply Management’s measure of manufacturing employment rebounded last month, its measure of services industry employment slipped.

The economy hit a speed bump in the third quarter in part because of the summer flare up in coronavirus cases, an ebb in the flow of pandemic relief money from the government and scarce raw materials, which have hammered motor vehicle sales.

The Atlanta Fed estimates that gross domestic product growth braked to a 1.3% annualized rate in the July-September quarter. The economy grew at a 6.7% pace in the second quarter.

The leisure and hospitality sector likely led the anticipated pick up in hiring last month, reflecting a rebound in payrolls at restaurants and bars, which fell by 42,000 jobs in August. A rebound in hiring at retailers is expected as businesses gear up for the holiday season.

Manufacturing employment probably slowed, likely constrained by input shortages, especially semiconductors. General Motors and Ford Motor Co announced production cuts at some plants in September as they manage their chip supply.

Government payrolls likely rebounded as schools fully reopened for in-person learning. There is cautious optimism that the return to classrooms boosted the share of women in the labor force.

Economists will also be watching the proportion of the work age population in the labor force for signs whether worker shortages were starting to ease.

Federal government-funded benefits expired in early September, affecting more than 6 million people. The expanded benefits, which offered unemployment checks to people who did not qualify for the regular state jobless benefits, were blamed by businesses and Republicans for the worker shortage.

There were a record 10.9 million job openings as of the end of July. But many unemployed appeared to have stashed away some of the money from the government, and are therefore in no hurry to start looking for jobs.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, has barely budged even as about 25 states led by Republican governors terminated the expanded benefits this summer.

Some economists say a significant portion of people who dropped out of the labor force have retired, thanks to a strong stock market and record house price gains, which boosted household wealth. Self employment has also increased.

“The current labor shortage will ease considerably this fall, especially following the expiration of federal benefits programs in September, but we still project an over one million hit to the labor force from early retirees and other labor force exits at end-2022,” said Joseph Briggs, an economist at Goldman Sachs in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)