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U.S. Goldilocks NFP job report may help Fed for QE tapering only from Dec’22 rather than Dec’21

calendar 07/06/2021 - 21:24 UTC

The U.S. stock market surged Friday on Goldilocks NFP job report as it will ensure stimulus by both Biden and Powell. As the U.S. job reports for the last few months are neither too good (hot) or too bad (cold), it's justifying Goldilocks nature of the economy, which will help Fed to be on hold for the foreseeable future, while also help Biden to pitch for infra stimulus. Fed may go for QE tapering only from Dec’22/late 2022 rather than Dec’21/late 2021 and in the meantime will gradually withdraw various emergency lending/liquidity tools under assistance from U.S. Treasury/Congress.

On Friday, all focus was on U.S. NFP data, which shows that the world’s largest economy added 559K jobs in May; above an upwardly revised 278K sequentially (April) but below market expectations of 650K. That leaves employment about 7.6M jobs below its peak in Feb’20 (pre-COVID).

The US unemployment rate dropped to 5.8% in May, sequentially from 6.1%, the lowest since Mar’20 (post-COVID) and below market expectations of 5.9% amid signs that the job market consolidated its recovery as the economy further reopened on the rapid progress of COVID vaccinations. Still, the headline unemployment rate remained well above the 3.5% recorded in Feb’20 (pre-COVID).

In May, notable job gains occurred in a consumer-facing service industry like leisure and hospitality, public and private education, health care and social assistance. Still, supply chain disruptions, higher raw material costs and labor shortages are weighing on capacity utilization; many workers mostly women, remain at home to care for their children (as physical schools are still not opened) and generous government PUA also incentivizing some lower-paid hourly wage workers to stay at home rather than join work or actively finding a new job.

As such, businesses have been struggling to rehire workers to cope with surging demand, prompting them to raise wages and introduce joining bonuses in a bid to attract new employees. A steady decline in the number of new COVID cases due to rapid herd immunity (COVID vaccinations) has allowed authorities to lift restrictions on businesses, but employers have been complaining that they cannot find enough workers to respond to growing demand.

Fed will assess further substantial progress of its maximum employment headline rate (employment/population) from Dec’20 levels, which was at 57.4%; now in May’21, it’s around 58.05% and this is not substantial progress as per Fed. The Fed may term 60% as substantial further progress against maximum employment rate around 61.1% in Feb’20 (pre-COVID).

If we consider the employment rate in terms of the labor force, it was around 96.52% in Feb’20 (pre-COVID), 93.31% in Dec’20 and 94.21% in May’21. But if we further consider Feb’20 labor force levels 164448K vs 160935K levels in May’21, the headline unemployment rate would be 7.80%, while the employment rate (wrt labor force) should be around 92.20%.

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Bottom line:

In may the number of unemployed people declined by 496K to 9316K while employment rose by 444K to 151620K in May, but still well below 1587735K employed persons in Feb’20, just before the COVID; i.e. the U.S. economy still needs to employ around 7115K (7.12M) people to reach maximum or pre-COVID employment levels. At around 540K present 4M moving average and expected accelerated rate after Sep-Dec’21 (PUA expiry and children/adolescents COVID vaccinations), it may take around April-June’22 for the U.S. economy to make substantial progress on maximum employment as-well-as price stability (core PCE inflation). Fed will consider maximum inclusive employment for its policy decisions, not mere headline unemployment number. Thus in that scenario, Fed may go for QE tapering from Dec’22 with an indication from Aug’22 Jackson Hole speech and official FOMC indication in the Sep’22 policy meeting.

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