Today’s employment report shows job gains in August were much slower than in the previous two months. Businesses somehow continue to produce more in spite of the severe shortage of available workers.
The Week That Was
Today’s report shows only 243,000 private sector payroll jobs were added in August, well below the 800,000 additions in June and July.
The smaller job gains are consistent with business surveys showing little or no job gains. The amazing thing is businesses are still rapidly expanding output in spite of employing 3½ percent fewer workers than at the pre-Covid peak.
The August ISM survey of manufacturing companies shows manufacturing increasing rapidly. The overall index was a strong 60, and the new orders component was an even stronger 66.
Manufacturing employment was reported to be down slightly in August. Businesses were generally optimistic in spite of widespread complaints over a scarcity of labor and materials aggravated by supply-chain problems.
Anecdotal reports of supply chain disruption should be monitored closely. If caused by excessive demand, the chain will fix itself. However, if there are other serious problems preventing businesses from producing, it could spell trouble for growth.
Weekly data for August show initial unemployment claims close to 350,000, down from the 400,000 area of recent months. The number of people receiving unemployment payments also continues to trend downward.
Things to Come
Later this morning the ISM survey for service companies will be released. It’s likely to show strong growth in the service sector, with readings close to 60.
The only economic news scheduled for next week is Friday’s report on wholesale prices in August.
Raw commodity prices rose 1 percent, but oil prices fell almost 7 percent from July to August.
In spite of some moderation in a few prices such as oil, wholesale prices for finished goods likely increased by ½ percent, equivalent to a 6 percent annual rate. Inflation will be with us for some time to come.
Market Forces
Stocks continued to move higher this week. The Nasdaq, S&P500, and small cap ETFs rose 2 percent to 3 percent. The Dow had a small gain, moving to within 1 percent of its all-time high.
The market continues to ignore the Delta variant, supply-side constraints, and the debacle in exiting Afghanistan.
None of these potential headwinds were able to withstand the Fed Chairman’s assurance there would be no hike in interest rates until after next year’s election.
Chairman Powell said inflation is under control. He also indicated rising prices were the result of almost anything but the Fed pouring more money into the economy.
That is typical Fedspeak. The Fed creates money with abandon, takes credit for a booming economy, then blames inflation on everything else. It’s called “modern monetary theory,” but it’s as old as money itself.
Based on early business surveys, I had expected some of the economic news for August to show brief signs of a slowdown. However, the ISM survey for manufacturing indicates business was strong, and new orders are signaling further strength.
The S&P500 is now 29 percent above its fundamental value.
So far, the Fed’s monetary explosion is carrying stocks well above their fundamental value. So long as the Fed is able to keep interest rates well below their normal levels, stock prices will remain elevated.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 29 percent
Monetary Policy: expansive