The Marriner S. Eccles Federal Reserve building in Washington, D.C., on Friday, Sept. 17, 2021.
Stefani Reynolds | Bloomberg | Getty Images

The Federal Reserve has a big meeting on tap next week, one that will be held under the cloud of an ethical dilemma and will be run by a policymaking committee that finds itself with fairly pronounced divisions about the path ahead.

Markets largely expect the Fed to follow the two-day session with no major decisions, but rather just the first but significant nods that the historically easy pandemic-era accommodation is coming to an end soon if slowly.

“Tapering” will be the word of the day when the post-meeting statement is issued Wednesday, at which time individual officials also will release their forecasts on the future arc of interest rates as well as economic growth and inflation.

All of that will be set against a backdrop of controversy: News reports in recent days indicate that Fed officials have been trading stocks and bonds that could be influenced at least indirectly by their policy decisions.

At the same time, speeches over the past several weeks indicate a schism between those who say the time is now to start tightening policy and those who’d rather wait.

For the normally staid Fed, the present circumstances are unusual and could yield some interesting dynamics.

“I think it’s embarrassing for the Fed. It had such a squeaky-clean reputation,” Greg Valliere, chief U.S. policy strategist at AGF Investments, said of the trading controversy that largely involved regional presidents Robert Kaplan of Dallas and Eric Rosengren of Boston. “But I don’t think it’s going to change policy in any regard at all. I think it will be rearview mirror pretty soon, assuming there’s no other shoe to drop.”

Valliere did note the issue will help fuel Fed critics such as Sen. Elizabeth Warren, D-Mass., who had been a vocal detractor of the Fed’s looser regulatory approach in the years since the 2008-09 financial crisis.

A matter of credibility

More than that, though, the Fed lives on its credibility, and some of the recent problems could dent that.

There’s the market credibility issue – Wall Street and investors need to believe that the Fed is at least mostly unified in its monetary policy approach to setting interest rates and associated moves that have market impact. Then there’s the public credibility – at a time when faith in Washington’s institutions has plunged, ethical missteps only add to that and can have repercussions, especially at such a delicate time.

“The ethics here look bad. They should have known better,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist of the National Economic Council during the Trump administration. “Once you lose that moral authority, it’s a problem.”

Rosengren, Kaplan and any other Fed officials who traded stocks didn’t violate laws or policies. In fact, that’s become part of the criticism leveled in some circles – that following the financial crisis the Fed didn’t do a housecleaning when it came to internal rules to make sure it avoided the kinds of conflicts that came to light during the crisis.

“Keep in mind, they already have [trading] rules they imposed on banks, for example, and yet the Fed’s governors don’t live by those same rules,” said Christopher Whalen, a Fed veteran and now chairman of Whalen Global Advisors. “After Dodd-Frank [the post-crisis banking reforms], every agency in Washington tightened up little conflicts like insider trading. And yet the Fed is somehow exempt from those rules? They look ridiculous.”

For its part, the Fed has noted that it is following rules for other government agencies and has supplemental rules as well.

Jerome Powell, nominee to be chairman of the Federal Reserve Board of Governors, shakes hands with US Senator Elizabeth Warren (R), Democrat of Massachusetts, prior to testifying during his confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, DC.
Saul Loeb | AFP | Getty Images

Still, a spokesman for the central bank said Thursday that Chairman Jerome Powell has directed Fed staff “to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials.”

“This review will assist in identifying ways to further tighten those rules and standards. The Board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct,” the official added.

The controversy comes against a delicate set of circumstances for the Fed.

The central bank is preparing to take its first steps to normalize policy again, after slashing benchmark interest rates to zero and doubling the size of its balance sheet through more than $4 trillion in bond purchases.

Fed officials are divided on policy: By Goldman Sachs’ count, six officials who have spoken publicly on the issue of tapering asset purchases are for it and six are against. On inflation, while Powell has said he expects price pressures to recede fairly soon, at least six Fed officials, including Governor Christopher Waller, have said they anticipate inflation to remain above the central bank’s 2% target beyond 2021.

One more complication thrown into the mix is that Powell’s term is set to expire in February, and President Joe Biden is expected to announce soon his preferred choice to lead the bank ahead. Most on Wall Street expect Powell to be nominated again, but there’s growing sentiment that Biden will move out Randal Quarles as vice chairman in charge of bank supervision and replace him with Governor Lael Brainard, who likely would use a heavier hand in bank regulation.

Amid all those pressures, Powell will have to make sure the Fed gets policy right and is able to clear away some of the contentiousness of late.

“It’s not a fait accompli that Jerome Powell is reappointed,” said LaVorgna, the Natixis economist. “The administration is understandably going to wait and see how the Fed handles the taper and what the markets do. That could be the determining factor in whether he’s reappointed.”

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Retail sales posted a surprise gain in August despite fears that escalating Covid cases and supply chain issues would hold back consumers, the Census Bureau reported Thursday.

Sales increased 0.7% for the month against the Dow Jones estimate of a decline of 0.8%.

A separate economic report showed that weekly jobless claims increased to 332,000 for the week ended Sept. 11, according to the Labor Department. The Dow Jones estimate was for 320,000.

Economists had expected that consumers cut back their activity as the delta variant continued its tear through the U.S. Persistent supply chain bottlenecks also were expected to hold back spending as in-demand goods were hard to find.

The pandemic’s impact did show up in sales at bars and restaurants, which were flat for the month though still 31.9% ahead of where they were a year ago.

However, sales were strong for most areas during the month, when back-to-school shopping generally results in a pickup in activity, especially so this year as schools prepared to welcome back students after a year of remote learning.

The headline number would have been even better without a 3.6% monthly drop in auto-related activity; excluding the sector, sales rose 1.8%, also well above the 0.1% expected gain.

With fears rising over the pandemic, shoppers turned online, with nonstore sales jumping 5.3%. Furniture and home furnishing also saw a healthy 3.7% increase, while general merchandise sales rose 3.5%.

Electronics and appliances stores saw a 3.1% drop, while sporting goods and music stores fell 2.7%.

The numbers overall reflected a more resilient consumer, with sales up 15.1% from the same period a year ago.

The retail upside surprise was tempered slightly with a disappointing read on jobless claims.

Initial filings increased 20,000 from a week ago after posting a fresh pandemic-era low. Still, the four-week moving average, which accounts for weekly volatility, declined to 335,750, a drop of 4,250 that brought the figure to its lowest point since March 14, 2020, at the pandemic’s onset.

The claims total came under heavy seasonal adjustments, as the unadjusted figure showed a drop in filings of 23,331 to 262,619.

Continuing claims also declined, falling by 187,000 to 2.66 million, also a new low since Covid hit. The four-week moving average nudged lower to about 2.81 million.

However, those receiving compensation under all programs actually increased just ahead of the expiration of enhanced federal jobless benefits. That total, through Aug. 28 and thus before the expiration, rose by 178,937 to 12.1 million.

In a separate economic report, the Philadelphia Federal Reserve reported its manufacturing activity index rose 11 points to 30.7, representing the percentage difference between firms reporting expanding activity against those seeing contraction. That number was well ahead of the Dow Jones estimate of 18.7.

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Prices for an array of consumer goods rose less than expected in August in a sign that inflation may be starting to cool, the Labor Department reported Tuesday.

The consumer price index, which measures a basket of common products as well as various energy goods, increased 5.3% from a year earlier and 0.3% from July. A month ago, prices rose 0.5% from June.

Economists surveyed by Dow Jones had been expecting a 5.4% annual rise and 0.4% on the month.

Stripping out volatile food and energy prices, the CPI rose just 0.1% for the month vs. the 0.3% estimate, and 4% on the year against the expectation of 4.2%.

The 5.3% annual increase still keeps inflation at its hottest level in about 13 years, though the August numbers indicate the pace may be abating.

Markets initially rallied following the release, with stock index futures well off their morning lows. However, the market headed lower after the open.

Energy prices accounted for much of the inflation increase for the month, with the broad index up 2% and gasoline prices rising 2.8%. Food prices were up 0.4%. Energy is up 25% from a year ago and gasoline has surged 42% during the period.

However, excluding those two categories resulted in the slowest monthly CPI increase since February.

Used car and truck prices, which had been a major feeder of the headline inflation gains, fell 1.5% in August but are still up 31.9% year on year. New vehicle prices, though, rose 1.2%.

Transportation services declined 2.3% for the month.

Federal Reserve officials have been watching inflation closely but have largely said they believe this year’s burst will be temporary and due to factors that will soon fade. They cite supply chain bottlenecks, shortages of critical products like semiconductors and heightened pandemic-related demand for goods as major contributors that at some point will drift back to normal levels.

Markets largely expect the Fed to start pulling back on some of the unprecedented monetary policy help the central bank has provided during the pandemic. Fed policymakers themselves have indicated that they probably will start slowing the pace of their monthly bond purchases before the end of the year.

Investor fears about inflation have calmed as well. The Bank of America Fund Manager Survey for September indicated that a net level of respondents now expect inflation to fall over the next 12 months. As recently as April, a net 93% were expecting it to increase.

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A customer wearing a protective mask shops inside an Albertsons grocery store in San Diego, California, June 22, 2020.
Bing Guan | Bloomberg | Getty Images

Tuesday’s report of the consumer price index could set the tone for markets ahead of next week’s Federal Reserve meeting, particularly if it is hotter than expected.

The CPI is expected to have risen 0.4% in August month over month, according to a Dow Jones consensus estimate. On a year-over-year basis, CPI would then be up 5.4%, the same pace it was in July. Excluding food and energy, CPI is expected to rise 0.3% or 4.2% year over year, according to estimates.

The data is set for release Tuesday at 8:30 a.m. ET.

Inflation data has been coming in stronger than expected, raising concerns it may be more persistent than Fed officials believe it to be. The Fed meets next Tuesday and Wednesday and is widely expected to discuss tapering its bond-buying program but not formally announce its plans until later in the year.

But some market pros say another warning about rising inflation could speed the Fed’s timetable even though August’s employment report was weaker than expected. Some market pros pushed back their expectations for a Fed announcement after August jobs gains totaled just 235,000, about 500,000 less than expected.

“If inflation is hot that would imply a little bit faster timeline from the Fed,” BMO U.S. rates strategist Ben Jeffery said. He noted he would expect a higher-than-expected pace to send interest rates higher.

CIBC Private Wealth U.S. chief investment officer David Donabedian said a hotter number could be a worry for stocks and send bond yields higher. Yields move opposite price.

He said the market will be focused closely on what components of the CPI are showing higher inflation rates.

Donabedian added he is watching to see if temporary Covid-related sources of inflation, such as hotels and airfare, began to ease, or if inflation was due to supply shortages. He said it now appears that supply chain issues are more severe than they seemed even just three months ago, and he expects inflation to continue to be an issue.

“Certainly the trend has been for the inflation number to come in above expectations. I think if that happens again, it will feed this narrative that high inflation is going to stick around longer than the Fed had been planning,” he said.

Donabedian said he sees about a 1-4 chance a hot CPI number could prompt the Fed to move sooner to announce the tapering. He said he is watching to see if things that might be more persistent, like rising rents will show up in the number.

“The Fed keeps saying they see inflation as being transitory. Yet the inflation data is getting worse rather than better,” CFRA chief investment strategist Sam Stovall said. “If it’s hotter than expected, I think the stock market’s going to continue to be soft. I think investors are trying to decide whether there’s more to this worry, than not.”

Stocks posted a mild comeback Monday following five days of losses for the Dow Jones Industrial Average partly tied to the inflation concern.

Some Fed officials in recent weeks have said they believe the central bank should start paring back its $120 billion a month bond purchases sooner rather than later. But Fed Chairman Jerome Powell has said he wants to see more strong employment reports before tapering is announced.

Stovall said he does not expect a formal announcement until November. The Fed’s move away from the bond purchase program would be its first major step away from it easy policy and ultimately sets the stage for interest rate hikes.

“If we end up with both headline and core CPI stronger than anticipated, I think certainly statements will be made regarding inflation, while it might not force them to say anything about tapering sooner,” Stovall said.

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Prices that producers get for final demand goods and services surged in August at their highest annual rate since at least 2010, the Labor Department reported Friday.

The producer price index rose 0.7% for the month, above the 0.6% Dow Jones estimate, though below the 1% increase in July.

On a year-over-year basis, the gauge rose 8.3%, which is the biggest annual increase since records have been kept going back to November 2010. That came following a 7.8% move higher in July, which also set a record.

The data comes amid heightened inflation fears fed by supply chain issues, a shortage of various consumer and producer goods and heightened demand related to the Covid-19 pandemic. Federal Reserve officials expect inflationary pressures to ease through the year, but they have remained stubbornly persistent, with Friday’s numbers indicating that the trend likely will continue.

Excluding food, energy and trade services, final demand prices increased 0.3% for the month, below the 0.5% Dow Jones estimate. Still, that left core PPI up 6.3% from a year ago, also the largest record increase for data going back to August 2014.

Final demand services rose 0.7% for the month, thanks to a 1.5% gain in trade services, or the margins received by wholesalers and retailers. Transportation and warehousing costs surged 2.8%.

About one-third of the overall gain came from health, beauty and optical goods, which jumped 7.8%. Prices related to outpatient hospital care held back the gains, falling 1.5%.

Prices for final demand goods rose 1% for the month, pushed primarily by a 2.9% gain in foods which in turn came from an 8.5% surge in meat prices. Slaughtered pouy prices surged 11%. Prices fell for iron, steel and diesel fuel.

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First-time filings for unemployment claims in the U.S. dropped to 310,000 last week, easily the lowest of the Covid era and a significant step toward the pre-pandemic normal, the Labor Department reported Thursday.

Claims had been expected to total 335,000 for the week ended Sept. 4, according to economists surveyed by Dow Jones.

The total for the week ended Sept. 4 represented a substantial drop from the previous week’s 345,000 and is the lowest since March 14, 2020. Claims may have been still lower except for a substantial bump in Louisiana, which was hammered by Hurricane Ida and still has nearly 250,000 homes and businesses without power.

Initial filings had been trending around 215,000 prior to when the pandemic was declared in March 2020. At their peak, initial filings hit 6.1 million and held above 1 million a week until early August 2020. A year ago at this time, weekly claims averaged 881,000.

Concerns have escalated in recent weeks around the employment picture, particularly after the Labor Department reported last week that nonfarm payrolls increased just 235,000 in August, about one-third of what Wall Street had been expecting. Growth in some areas appears to have slowed amid rising fears over the Covid delta variant.

The claims numbers, though, have been averaging 339,500 over the past four weeks and lend support to a labor market recovery.

President Joe Biden in a statement said the claims report “is further evidence of a durable economic recovery.”

Continuing claims, which run a week behind the headline number, dropped as well, falling to 2.78 million, a decrease of 22,000 from the previous week but higher than the FactSet estimate for 2.73 million. That also is the lowest level since March 14, 2020. The four-week moving average for continuing claims dropped to 2.84 million.

Total recipients under all unemployment programs declined to 11.93 million, a drop of 255,757 as the federal extended benefits expired Monday. That number totaled 30.4 million a year ago.

Initial claims dropped most in Missouri (-7,676), Florida (-3,886) and New Yok (-3,561), according to unadjusted data. Those declines came against gains in hurricane-ravaged Louisiana (7,259), California (5,604) and Michigan (4,823).

The claims numbers come amid a burst in job openings as employers struggle to fill open positions.

Available jobs totaled 10.9 million at the end of July, according to Labor Department numbers released Wednesday. That was easily a record high and an increase of 749,000, or 7.4%, from June.

The Federal Reserve on Wednesday said job creation around the country “ranged from slight to strong” from July through August.

In its periodic Beige Book report of regional economies, the central bank also noted “extensive” shortages of available workers and said companies were raising wages to try to fill positions. The Fed said growth overall “downshifted slightly to a moderate pace” for the period.

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U.S. businesses are experiencing escalating inflation that is being aggravated by a shortage of goods and likely will be passed onto consumers in many areas, the Federal Reserve reported Wednesday.

In its periodic “Beige Book” look at the nation’s economic picture, the central bank also reported that growth overall had “downshifted slightly to a moderate pace” amid rising public health concerns during the July-through-August period that the report covers.

“The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions,” the report said.

Rising inflation pressures are part of that picture in which a shortage of workers is being met by higher salaries.

The report noted that inflation is “steady at an elevated pace,” with half the Fed’s 12 districts reporting “strong” pressure while the other half said it was “moderate.” However, the details of the report show that the issue is growing. The Fed’s preferred inflation gauge showed an increase of 3.6% in July, but most other measures are higher.

“With pervasive resource shortages, input price pressures continued to be widespread,” the report said.

Businesses reported “substantial escalation in the cost of metals and metal-based products, freight and transportation services, and construction materials,” though timber moved lower.

They also said the price pressures at the supply level likely will find their way to store shelves.

“Even at greatly increased prices, many businesses reported having trouble sourcing key inputs,” the report said. “Some Districts reported that businesses are finding it easier to pass along more cost increases through higher prices. Several Districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead.”

The Beige Book release comes as the Fed debates whether to withdraw some of the extreme policy accommodation it has provided since the pandemic began. Specifically, officials are considering tapering monthly bond purchases, probably before the end of the year.

Those in favor of keeping policy in place worry primarily about the state of employment. The unemployment rate has fallen to 5.2%, but payroll growth slowed considerably in August amid fears over the Covid delta variant.

The Beige Book said all districts reported job growth, though it varied from “slight to strong.” Business contacts cited “extensive labor shortages” despite “strong” wage growth particularly among lower earners, the main area the Fed is targeting with a policy adjustment it approved a year ago.

“Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers,” the report said.

Job offerings totaled a record 10.9 million in July, the Labor Department reported Wednesday. Hirings, though, were little changed as businesses deal with the labor shortage.

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Thomas Trutschel | Photothek | Getty Images

Now might be a good time for the Federal Reserve to start worrying about inflation.

August’s jobs report, besides being a big disappointment on the 235,000 headline number, also showed that even with weak hiring, wages are rising.

Average hourly earnings jumped 0.6% for the month, about double what Wall Street had been expecting, and the increase from a year ago stood at a robust 4.3%, up from a 4% rise a month ago. Even leisure and hospitality, which saw zero net job growth in August, saw wages jump 1.3% for the month and 10.3% on the year.

Those numbers come as the Fed is weighing when to start pulling back on the historically easy monetary policy in place since the early days of the Covid-19 pandemic. Some voices on Wall Street expect the wage and inflation numbers to start resonating with Fed officials.

“The 5.2% unemployment rate and rapidly rising wages suggest building inflationary pressure that will ultimately lead to more hawkish policy,” Citigroup economist Andrew Hollenhorst wrote in a detailed analysis of the current jobs situation.

While Fed officials mostly discuss the total payroll gains, Hollenhorst said he “would expect this rhetoric to shift a bit, perhaps at the September [Federal Open Market Committee] meeting, with more focus on the high level of job openings and increasing wages.”

Fed Chairman Jerome Powell went to great lengths in his annual speech in August during the central bank’s Jackson Hole symposium to knock down concerns about rising wage pressures as well as inflation overall, despite consistently higher numbers.

“Today we see little evidence of wage increases that might threaten excessive,” Powell said during the Aug. 27 speech. Measures Powell said he follows – he did not mention the Labor Department’s monthly average hourly earnings figure – point to “wages moving up at a pace that appears consistent with our longer-term inflation objective.”

One specific measure Powell mentioned was the Atlanta Fed’s Wage Growth Tracker.

That measure looks at wages on monthly and 12-month basis and then uses a three-month moving average to iron out distortions. On a smoothed level, the tracker is showing wages rising at a 3.7% pace, fairly consistent with the past few years. Without smoothing, the 12-month rate runs to 4.2%, which is the highest since 2007 and representative of how bumpy the data has gotten lately.

The Atlanta Fed will next update the tracker Friday, giving the Fed another look at potential pressures that could trigger a wage-price spiral, which economists consider “bad” inflation.

Fed officials thus far have attributed higher inflation numbers to supply issues. A continued rise in wages could signal that demand is becoming a factor.

“When it is difficult to disentangle demand from supply effects, price signals become more important to assess the extent of excess demand,” wrote Nomura chief economist Rob Subbaraman.

Concerns about policy

To be sure, there also is evidence that some of the issues that might spur inflation could abate ahead, particularly some of the supply chain issues Powell has cited.

The chairman also noted that unit labor costs remain low, meaning that companies still aren’t spending substantially more for productivity, which also could tamp down inflation.

“They’re taking a lot of solace in all these other factors,” said Mark Zandi, chief economist at Moody’s Analytics. “Inflation is on their radar screen, but it’s not blinking red, not even yellow.”

The rising wage numbers under most circumstances would be considered a positive.

However, the gains trailed the headline consumer price index growth of 5.4% in July and only matched the 3.6% increase when stripping out food and energy prices in July, the most recent month for which data is available.

Some central bank officials and economists worry that easy Fed policy is feeding inflation and starting to cause more harm than help. Rising home prices and high inflation expectations from consumers are fueling some of those fears.

“It is not surprising that a combination of doubling central bank assets over the past 18 months, massive fiscal stimulus, and a skill mismatch in the labor market has resulted in inflation rising to levels not seen in decades,” wrote Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “Drilling a square peg into a round ole does not solve problems. It worsens it.”

Still, Zandi thinks Powell and the Fed will be content with allowing wages to rise for now.

“It’s not like they’re dismissing this as an issue. It’s a factor in their thinking about broader inflationary pressures,” he said. “But so far, they’d say the wage growth they’re observing is more a feature than a bug.”

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Job creation for August was a huge disappointment, with the economy adding just 235,000 positions, the Labor Department reported Friday.

Economists surveyed by Dow Jones had been looking for 720,000 new hires.

The unemployment rate dropped to 5.2% from 5.4%, in line with estimates.

August’s total — the worst since January — comes with heightened fears of the pandemic and the impact that rising Covid cases could have on what has been a mostly robust recovery. The weak report could cloud policy for the Federal Reserve, which is weighing whether to pull back on some of the massive stimulus it has been adding since the outbreak in early 2020.

“The labor market recovery hit the brakes this month with a dramatic showdown in all industries,” said Daniel Zhao, senior economist at jobs site Glassdoor. “Ultimately, the Delta variant wave is a harsh reminder that the pandemic is still in the driver’s seat, and it controls our economic future.”

Leisure and hospitality jobs, which had been the primary driver of overall gains at 350,000 per month for the past six months, stalled in August as the unemployment rate in the industry ticked higher to 9.1%.

Instead, professional and business services led with 74,000 new positions. Other gainers included transportation and warehousing (53,000), private education (40,000) and manufacturing and other services, which each posted gains of 37,000.

Retail lost 29,000, with the bulk coming from food and beverage stores, which saw a decrease of 23,000.

“The weaker employment activity is likely both a demand and supply story — companies paused hiring in the face of weaker demand and uncertainty about the future while workers withdrew due to health concerns,” Bank of America economist Joseph Song said in a note to clients.

The report comes with the U.S. seeing about 150,000 new Covid cases a day, spurring worries that the recovery could stall heading into the final part of the year.

“Delta is the story in this report,” said Marvin Loh, global macro strategist for State Street. “It’s going to be a bumpy recovery in the jobs market and one that pushes back against a more optimistic narrative.”

The month saw an increase of about 400,000 in those who said they couldn’t work for pandemic-related reasons, pushing the total up to 5.6 million.

“Today’s jobs report reflects a major pullback in employment growth likely due to the rising impact of the Delta variant of COVID-19 on the U.S. economy, though August is also a notoriously difficult month to survey accurately due to vacations,” said Tony Bedikian, head of global markets at Citizens.

Still, the news wasn’t all bad for jobs.

The previous two months saw substantial upward revisions, with July’s total now at 1.053 million, up from the original estimate of 943,000, while June was bumped up to 962,000 from 938,000. For the two months, revisions added 134,000 to the initial counts.

Also, wages continued to accelerate, rising 4.3% on a year-over-year basis and 0.6% on a monthly basis. Estimates had been for 4% and 0.3% respectively.

An alterative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons fell sharply, dropping to 8.9% in August from 9.6% in July.

The labor force participation rate was unchanged at 61.7%, still well below the 63.3% in February 2020, the month before the pandemic declaration.

Employment also remained well below pre-Covid levels, with 5.6 million fewer workers holding jobs and the total workforce still smaller by 2.9 million.

Another key Fed metric, the employment-to-population gauge, stood at 58.5%, up one-tenth of a percentage point from July but still well below the 61.1% pre-pandemic level. The measure looks at total jobholders against the working-age population.

August’s numbers have been volatile in past years and often see substantial revisions. They come amid other positive signs for employment.

Weekly jobless filings have fallen to their lowest levels since the early days of the pandemic in March 2020, but a large employment gap remains.

It’s not that there aren’t enough jobs out there: Placement firm Indeed estimates that there are about 10.5 million openings now, easily a record for the U.S. labor market. ZipRecruiter on Friday noted sharp gains in job postings for travel, arts and entertainment and education, generally signaling that those sectors should see strong gains ahead.

Fed officials are watching the jobs numbers closely for clues as to whether they can start easing back some of the policy help they’ve been providing since the pandemic started.

In recent weeks, central bank leaders have expressed optimism about the employment picture but said they would need to see continued strength before changing course. At stake for now is the Fed’s massive monthly bond-buying program, which could start getting scaled back before the end of the year.

However, if the jobs data gets softer, that could prompt Fed officials to wait until 2022 before tapering its purchases. Fed officials have been clear that interest rate hikes will come well after tapering starts.

“I still expect them to taper by year end,” said State Street’s Loh. “Maybe some of the more aggressive conversations about something happening in September are off the table. I think November is still a possibility.”

The Fed meets next on Sept. 21-22.

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The hiring blitz at bars, restaurants and hotels came to an abrupt halt in August as more Covid-19 cases and a scarcity of willing workers kept employers from adding to payrolls.

The broad leisure and hospitality sector, which includes restaurants and lodging, added a net of zero jobs last month. That’s a remarkable stop to a sector that had jumped by an average 350,000 per month over the prior six months.

A closer look within the sector shows a loss of 42,000 jobs in food services and drinking places offset by a gain of 36,000 jobs in arts, entertainment and recreation.

The headline numbers from the August jobs report showed the U.S. economy added just 235,000 jobs last month, well short of the 720,000 expected. The unemployment rate fell from 5.4% to 5.2%. CNBC studied the net changes by industry for August jobs based on data contained in the government’s employment report.

The Labor Department noted the flat employment in leisure and hospitality coincided with a drop in consumer confidence, which fell in part due to concerns about rising Covid cases last month due to the delta variant.

Leisure and hospitality added 2.1 million jobs from February through July — half of all U.S. jobs added over that period. The Bureau of Labor Statistics said leisure and hospitality employment is 10% below where it was in February 2020.

The “headline number is obviously disappointing – much lower than expectations – and markets will react. But the interesting question is why the number is so low,” Commonwealth Financial Network chief investment officer Brad McMillian wrote.

“Looking at the unemployment and underemployment numbers, which dropped, as well as the labor force participation rate, it looks to have come from workers electing not to enter the workforce,” he added. “This ties the shortfall to the pandemic, again, rather than to general economic weakness.”

Retail trade, which has lost jobs over several years, shed 28,500 positions in August. Food and beverage stores, as well as building material and garden supply stores, saw net job losses of 23,200 and 13,000, respectively.

Building and garden shops likely saw payrolls decline ahead of the cooler months and a deceleration in Covid-era at-home projects.

On the upside, manufacturers had a decent month with 37,000 new jobs amid strong hiring at transportation equipment makers. Factories that produce cars and car parts saw some of the sector’s strongest numbers, up 24,100.

Transportation and warehousing came out best in August with a gain of 53,200 net payrolls. The Labor Department said warehouses and other storage facilities added 20,200 jobs while air transportation advanced by 11,400.

CNBC’s Nate Rattner contributed reporting.

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