July 2, 2021

The economy generated an impressive 850 thousand jobs in June.  Having closed out the second quarter on a strong note it appears that robust GDP growth will continue throughout the summer.  We now expect 9.0% GDP growth in the second quarter, followed by 7.9% growth in each of the final two quarters of the year.  Every demand side indicator of the economy is consistent with a robust pace of economic activity.  But almost universally manufacturing and service sector firms complain about an inability to hire an adequate number of new workers, record long lead times in ordering materials, wide-scale shortages of some critical materials, rising commodity prices, and difficulties in transporting products.  Equally important these firms expect those difficulties to persist through yearend.  However, with federal unemployment benefits scheduled to expire after Labor Day, some relief from the current extreme worker shortage is in sight  And if manufacturing and service sector firms can find ways to work around their supply-side difficulties in coming months, GDP growth should remain solid for some time to come.

The June employment report did contain some mysteries.  Payroll employment rose 850 thousand in that month.  But civilian employment, which is used to calculate the unemployment rate, declined by 18 thousand.  So which to believe?  Go with the 850 thousand increase in payroll employment.  Payroll employment reflects jobs reported by firms of all types.  It is based on solid data – the number of workers on business payrolls this month versus last month.   The data used to calculate civilian employment and the unemployment rate is derived from knocking on doors and asking people if they have a job.  But when you are visited by someone from a government agency asking about your employment, it is unclear whether you are willing to provide accurate information.  There is a conceptual difference in that the measure of civilian employment also includes self-employed workers which are not captured in the establishment survey so, theoretically, self-employed workers could have fallen by 868 thousand in June.  But that makes no sense.   Almost invariably the most accurate barometer comes from the payroll survey.  The alternative measure of employment from the consumer survey is known to bounce around wildly from month to month.

But perhaps the most significant piece of recent data this past week came from the monthly survey of manufacturing firms conducted by the Institute of Supply Management.  Comments from participants in this survey are always enlightening.   One person noted that customer demand remains strong but supply chain issues continue to hamper materials availability and impact production.  Another said that higher prices, inflation, and lack of available labor are impacting our supply change.  And yet another noted that supply disruptions continue with no end in sight.  There is a pattern here — supply constraints are beginning to curtail the economy’s ability to produce.  We expect a reasonably robust 9.0% GDP growth rate in the second quarter but, judging from comments such as these, it could have been more robust.

It will take a while for these imbalances to be rectified.  During the dramatic GDP drop in the second quarter of last year firms laid off 22 million workers, they closed production lines.  Everybody knew that demand would eventually resurface, but once the vaccines became available in first few months of this year demand did not come back gradually — it returned with a vengeance.  Unfortunately, the economy is not like a light switch that can be turned on or off.  Many of those laid off workers sought employment in other industries. Some are taking advantage of government provided generous unemployment benefits.   Suppliers for manufacturing firms cannot easily restart mothballed production lines.  It takes time to order and receive materials from overseas.  There are not enough ships to deliver those goods.  Ships wait for days or even weeks to unload their cargos.  Those problems can be fixed, but they cannot get repaired overnight.  Purchasing managers expect those difficulties to linger through the end of this year.  But whatever goods are not produced in the second quarter, will be produced in the third or fourth quarter.  Thus, supply constraints do not alter the picture of robust growth for some time to come, but they can shift growth from one quarter to another.

Almost without exception firms complain about not being able to find enough workers, but yet they apparently found 850 thousand bodies to hire in June.  Does this mean that they really needed more than one million workers, but could only find 850 thousand?  And if they found 850 thousand workers, where exactly did they find them?  Did the labor force rise sharply?  The bottom line is that we do not know.  Sometimes economists can turn to the unemployment statistics to gain some insight.  But in June the labor force presumably increased 151 thousand while civilian employment fell 18 thousand.  But somehow those data do not square with other things that we know.  The weekly data on layoffs continued to decline during the course of June which appears consistent with strong employment growth, not a decline of 18 thousand.  The ADP survey of employment showed a jobs gain of 692 thousand.  Job openings are at a record high level.  Our conclusion is that the labor force and employment data used in calculating the unemployment are often volatile and unreliable.  In June they appear to have gotten way out of sync with other known employment statistics.

The economy and the labor market remain solid.

Stephen Slifer


Charleston, S.C.