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Key Points for the Week

  • U.S. payrolls grew 943,000 last month, beating expectations and reaffirming the strength of the U.S. jobs market.
  • Restaurants, bars, and other leisure and hospitality businesses continued to rehire and accounted for 40% of the new jobs last month.
  • Unemployment dropped to 5.4% even as labor force participation edged higher.

For months, investors have wondered when the Federal Reserve (Fed) might begin to “normalize” its policies, a process that will eventually lead to higher interest rates. Last week, a better-than-expected unemployment report – showing a gain of almost a million jobs – sparked speculation about whether we’ve arrived at that point. It’s difficult to know.

When the pandemic arrived, the Fed adopted policies that stimulated growth. It cut short-term interest rates to zero and began buying Treasuries and agency mortgage-backed securities to keep long-term rates low, too. Low rates make borrowing less expensive for businesses and individuals, reported the Brookings Institute. That’s important in economically challenging times.

In late July, the Fed said it would continue to keep rates low and buy bonds until it saw “substantial further progress toward maximum employment and price stability [inflation] goals.”

The Fed may have already achieved its inflation goal. Its favorite inflation gauge is called Personal Consumption Expenditures (PCE), excluding food and energy. It’s a statistic that reflects changes in how much Americans are paying for goods and services. In June, the Bureau of Economic Analysis reported that PCE was up 3.5 percent year over year. That’s well above the Fed’s two percent inflation target; however, the Fed’s new policy is to overshoot its target before raising rates.

If July’s employment numbers satisfy the Fed’s expectations for progress on jobs, the Fed may begin the process of normalizing monetary policy. The first step would be purchasing fewer bonds, a practice known as tapering. “Many market watchers are looking for [Fed Chair] Powell to discuss tapering at the central bank’s big policy meeting at Jackson Hole, Wyo., this month,” reported Randall Forsyth of Barron’s.

This Week in the Markets

A strong U.S. employment report was the top market event last week. Payrolls surged 943,000, and the prior two months were revised higher by 119,000. Restaurants and bars continue to rehire workers as activity expands. The leisure and hospitality segment, which includes eating establishments, added 380,000 jobs.

Unemployment dropped from 5.9% to 5.4%. Wages increased 0.4%, which is a modestly faster rate than prior to the pandemic. Wage gains at restaurants and bars are growing even faster as restaurants are anxious to rehire amid worker shortages.

Stocks benefited from the news. The S&P 500 gained as did the MSCI ACWI. The Bloomberg BarCap Aggregate Bond Index dropped as the strong jobs report caused some investors to expect the Federal Reserve to tighten policy sooner. Inflation data in the U.S. and China will headline key economic releases this week.


The U.S. jobs market is making its own case for reaching the high level of performance many had anticipated. After some bumpy performance early in the year, the last two reports have shown the economy is surpassing expectations.

July nonfarm payrolls expanded 943,000, easily beating an average prediction of 875,000. The prior two months were revised a combined 119,000 higher. Adding the revisions to the preliminary July estimate means more than 1 million people were employed at the end of July than was estimated one month earlier.

The biggest gains were in restaurants and bars, which added 380,000 new jobs and accounted for 40% of the net gains in July. Even with the gains, demand is robust. Fast food restaurants used to advertise their chicken sandwiches or sales to lure customers in. But now restaurants are using billboards to advertise job openings. Supply, rather than demand, is the current problem.

Even with the gains, the economy has only recovered 75% of the jobs lost since February 2020. There are still 5.7 million fewer workers than the pre-pandemic peak. Education hiring has been weak throughout the pandemic. Like other sectors where labor supply is a key challenge, the back-to-school season may be more about getting teachers back to the classroom than purchasing new clothes.

Wages continue to creep higher as companies encourage the reluctant to return to work. Average hourly earnings rose 0.4%, which is just slightly faster than the pace prior to the pandemic. During the last year, wages have risen 4% even though many of the new jobs are being added in lower-wage sectors.

Stocks generally reacted favorably to the news. As noted above, the S&P 500 rose 1.0% last week and finished higher on Friday, after the employment data was released. Bonds took the other track and finished the week lower as interest rates increased in response to the positive economic news. Bond prices move in the opposite direction of interest rates. The concern isn’t so much that the Fed will raise rates significantly sooner. The probability of a rate hike by the end of next year moved up just 1% and remains slightly above 40%. Instead, investors are focused on whether the Fed will taper off its purchases of long-term government bonds and mortgages, potentially allowing long-term rates to rise.

One of the temptations facing investors is to reduce risk in the face of uncertainty as the desire to avoid downturns can be alluring. But bearing risk and downturns are part of investing. Investing and volleyball will have some bad moments, like service errors and downturns, but statistics show putting up with the temporary pain can allow us to reach our goals and win the match.

What’s Making us More Productive?

While the United States has not yet recovered all of the jobs lost during the pandemic – 22 million were lost and 16.6 million have returned – productivity is higher than it was when more people were employed. The Economist reported:

Though output reached a new high in the second quarter, employment remained more than 4 percent below its pre-pandemic level. At present, America is producing more output than it managed just a year and a half ago, with roughly 6 million fewer workers.

The Economist

Higher productivity undoubtedly reflects the ingenuity of American businesses. The pandemic forced companies to find ways to remain productive. In response, many adopted new technologies, implemented new patterns for working, and changed their business models.

However, not all companies have experienced gains in productivity, reported Eric Garton and Michael Mankins in the Harvard Business Review. Those that proved to be the best at managing time, talent and energy – the top 25 percent of companies – were 40 percent more productive than other companies. (The productivity of companies in the lower quartiles was averaged to make the comparison.)

Not all sectors of the economy are equally productive, either. “The surge in output per worker also reflects the changing mix of the workforce. Employment in the leisure and hospitality industries, where productivity tends to be low, remains about 10 percent below the pre-pandemic level, compared to a 3 percent shortfall in the higher-productivity manufacturing sector,” reported The Economist. As less productive sectors recover, productivity may return to previous levels.

In the meantime, some employees have been wondering whether it’s necessary to return to the workplace when productivity has been high while they’ve been working remotely. In an early July survey conducted by The Conference Board, a majority (56 percent) of employees asked whether returning to the workplace was wise, but just 18 percent of chief executive officers shared the concern.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance.

Be Aware of Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

August 9, 1974: Gerald Ford Becomes President after Richard Nixon Resigns

In accordance with his statement of resignation the previous evening, Richard M. Nixon officially ended his term as the 37th president of the United States on August 9, 1974. Before departing with his family in a helicopter from the White House lawn, he smiled farewell and enigmatically raised his arms in a victory or peace salute. The helicopter door was then closed, and the Nixon family began their journey home to San Clemente, California. Richard Nixon was the first U.S. president to resign from office.

Minutes later, Vice President Gerald R. Ford was sworn in as the 38th president of the United States in the East Room of the White House. After taking the oath of office, President Ford spoke to the nation in a television address, declaring, “My fellow Americans, our long national nightmare is over.”

Ford, the first president who came to the office through appointment rather than election, had replaced Spiro Agnew as vice president only eight months before. In September 1974, Ford pardoned Nixon for any crimes he may have committed while in office, explaining that he wanted to end the national divisions created by the Watergate scandal.

Weekly Focus

If liberty means anything at all, it means the right to tell people what they do not want to hear.

George Orwell, English Novelist

Children, I came to understand, need you around even if they ignore you. In fact, they need you around so they can ignore you.

Ruth Reichl, American Chef