Quote of the Week

“I recommend you take care of the minutes and the hours will take care of themselves.” – Earl of Chesterfield

Tech Corner

Overcoming jitters about the Delta Variant and the reintroduction of mask requirements, stocks climbed higher on strong employment data and a fresh batch of strong corporate earnings.

Last week the Dow rose +0.78% while the S&P 500 advanced +0.94%. the Nasdaq gained +1.11% and the MSCI EAFE which tracks developed overseas stock markets, picked up +1.61%

On Friday last week we got the Job’s Report for July, showing employers had added 943,000 new jobs. That was the biggest jump since August 2020. It is anticipated that this level or close to it will continue for a couple of months. This hiring increase cut the unemployment rate to 5.4%, down from 5.9% in June. All good news. In Larry’s Thoughts you can read a detailed analysis of the Job’s report from The Real Economy Blog.

The other big news coming out of Washington is the bi-partisan $1 trillion Infrastructure Bill currently in the Senate. The cost to the deficit is estimated to be $256 billion over the next ten years by the Congressional Budget Office. That doesn’t take into consideration the cost savings of an improved infrastructure.

It seems to me that those in Congress who are objecting to the cost either don’t understand math or are duplicitous at best considering that the 2017 tax cut will cost the Treasury $1.5 trillion before it “sunsets” in 2025.

I have done a little math on this issue. Tom Smith from the American Society of Civil Engineers estimates that our poor infrastructure (Grade D+) costs every American household $3,300 per year in car repairs, delayed shipments, freight damage, traffic jams, and other infrastructure issues. If you multiply $3,300 per household times the 128,450,000 number of households in 2020 you get $423,885,000,000 or in simpler terms, a cost of $423 billion per year. Assuming that the $1 trillion only improves our infrastructure by 50%, the $256 billion or the next 10 seems like a pretty good bargain.

Larry’s Thoughts

Another great article from The Real Economy Blog: https://realeconomy.rsmus.com/july-employment-report-robust-gains-mark-summer-hiring-peak/

July employment report: Robust gains mark summer hiring peak


The U.S. economy is expanding in a robust manner and it should be of little surprise that hiring is on a tear, averaging 831,000 new jobs over the past three months as the service sector continues to gain pace.

In July, the economy generated 943,000 new jobs and the unemployment rate declined to 5.4% because of a statistically significant increase of 1.043 million new jobs in the Labor Department’s household survey released on Friday.

Moreover, a second straight month of strong gains in aggregate hours worked and an increase in overtime imply that labor conditions will continue to bolster spending through the final two months of summer and the onset of what we think is going to be an epic back-to-school shopping season.

Once one adds in the 4% gain in average hourly wages on a year-ago basis, the July estimate stands with one of the best monthly jobs reports in recent memory.

Although there are some seasonal quirks that slightly exaggerated the top-line total gains over the past two months, once one accounts for the upward revision to the June estimate, the total change in employment increased by 1.062 million on the month.

In July, employment rose by 221,000 in local government education and by 40,000 in private education. Staffing fluctuations in education because of the pandemic have distorted the normal seasonal buildup and layoff patterns, likely contributing to the job gains in July.

During the first seven months of the year, there have been 3.72 million jobs added to the economy. Still, the economy remains 5.7 million jobs short of pre-pandemic levels and policymakers will cite this shortfall as a reason why fiscal and monetary policies need to remain in an accommodative stance for some time.

Policy takeaway

So do July’s gains constitute substantial further progress that the Federal Reserve is using as a benchmark to potentially change policy? Our sense is that the July data and the upward revisions to the June estimate will put added market and political pressure on the Federal Reserve to map out its plan to begin paring down its $120 billion per month in asset purchases.

While we would make the case that risks around the delta variant are sufficient to push that start date back until the end of the year, the strong data published by the Bureau of Labor Statistics on Friday will almost certainly heighten talk in the market of the Fed needing to move sooner rather than later. That being said, we do think that anyone expecting that talk to begin in earnest at the Kansas City Fed’s upcoming Symposium on Monetary Policy will most likely be disappointed.

Looking ahead

The June and July periods, when more than 1.88 million jobs were created, will most likely represent the cyclical peak in overall hiring.

Although we do expect hiring will remain strong, one should anticipate a modest deceleration in hiring. The risk to our forecast is clearly linked to the rise of the delta variant and a potential delay in the return of many to work as schools reopen and child care becomes more available. In July, 1.6 million people were prevented from looking for work because of the pandemic, which was essentially unchanged from June. It is reasonable to anticipate that the culture wars around masks and the unvaccinated will spill over into hiring as both employers and labor hesitate to evaluate the risks to all concerned.

In addition, despite the improvement in goods-producing jobs, supply chain constraints are affecting the manufacturing and construction sectors that will continue to dampen gains in those ecosystems until those constraints and bottlenecks are resolved.

Inside the data

Beneath the headline number, private sector hiring increased by 703,000 with trade and transport adding 47,000. Retail trade declined by 6,000, information added 24,000, financial 22,000, business services 60,000 and temporary help 10,000. There were 380,000 jobs added in education and health.

Higher-paying goods-producing jobs increased by 87,000, construction by 11,000 and the manufacturing sector by 27,000.

The wage outlook continued to reflect the changing balance of power between labor and management, with average hourly earnings up by 0.4% on the month and by 4% on a year-ago basis. On a three-month average annualized pace, average hourly earnings are up by 5.2%, all of which bodes well for another strong quarter of consumer spending.

Aggregate hours worked increased by 0.6% in July. The labor force participation rate increased by a tick to 61.7% while the employment-to-population ratio increased noticeably to 58.4%.

In July, 13.2% of employed people teleworked because of the pandemic, down from 14.4% in the prior month. These figures refer to employed people who teleworked or worked at home for pay at some point in the past four weeks specifically because of the pandemic.

For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.

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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

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