By Chuck Lieberman, Co-founder & CIO

The August employment report actually fit in quite well with investor expectations, even though job growth was well below the consensus. Hiring is being held back by the Delta variant and the unwillingness or inability or people to return to work, even as firms increase pay to attract or keep workers. Critically, wage inflation pressures are fully apparent. The latest data will not likely change many minds at the Fed, but tapering is surely coming.

The rise in average wage rates was larger than expected in August, which is the first month rapid job growth in the leisure and hospitality sector didn’t distort that measure to the downside. Leisure and hospitality workers are the lowest paid sector, so when many people are hired in these industries, the average wage rate across the economy is reduced. This August, hiring in these industries was zero. So, the 0.6% rise in wage rates across the economy represents a cleaner look at what’s happening to wage rates more broadly and they are rising fairly rapidly. This news fits quite well with all kinds of anecdotal reports, such as the latest announcement by Walmart that it is boosting wages (again). It is clear that firms are still trying to hire and offering to pay more, but workers are still reluctant to accept jobs for the assorted reasons we all recognize. That imbalance between supply and demand is lifting wage rates, as should be expected.

With somewhat less hiring, growth is likely to moderate in Q3 compared to Q2 and Street estimates have been coming down. Still, it would be highly inappropriate to think the economy will enter a period of stagflation. Growth remains quite strong and it may pick up after schools reopen, extra unemployment insurance benefits expire immediately after Labor Day, and (hopefully) Covid cases begin to moderate.

The Fed will remain highly divided. Some look back to the highs pre-pandemic and believe many people remain to be hired, so policy should remain accommodative for a longer period. Others will look at the decline in the unemployment rate and the rise in wage inflation, which suggests that the Fed’s highly expansionary policies are now inappropriate. It is our judgment that a tapering of the Fed’s bond buying program will be announced soon, although it isn’t clear if it will follow the September FOMC meeting.

The markets will not wait, however. Investors tend to look ahead. Tapering is coming and inflation may not prove as transitory as suggested by Chairman Powell. And interest rates are not high enough to compensate investors for these risks. Smartly, the bond market steepened after the jobs report, with longer term rates rising more than short rates.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

About the Author

Dr. Charles Lieberman

Dr. Charles Lieberman

Dr. Charles Lieberman is the Chief Investment Officer and co-founder of Advisors Capital Management, LLC. Dr. Lieberman began his professional career as an academic at the University of Maryland and Northwestern University. After five years in academia, he joined the...
About the Author

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