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Economic & Housing Weekly Note

June Jobs Report Shows Strength, Though Supply Chain Problems Continue to Inhibit Growth in Some Sectors

July 2, 2021

Key Takeaways:

  • Nonfarm payroll employment jumped by 850,000 in June, the largest increase since August 2020, according to the Bureau of Labor Statistics. Leisure and hospitality employment gained 343,000. Retail trade employment rose 67,000, while residential construction employment (including specialty trade contractors) rose 15,200. Employment in education (private and public) also soared, rising 268,300 (though some of this gain is likely due to an abnormal seasonal pattern of returning to in-person education). The unemployment rate rose one-tenth to 5.9 percent, though the labor force participation rate was unchanged at 61.6 percent.
  • Light vehicle sales plunged 10.2 percent in June to a seasonally adjusted annualized rate of 15.4 million, the lowest level since August 2020, according to Autodata.
  • The ISM Manufacturing Index was mostly flat in June, declining 0.6 points from the month before to 60.6, which is still solidly in expansion territory (any reading above 50 indicates expansion). Notably, the manufacturing prices index increased 4.1 points to 92.1, the highest level since 1979. The employment index fell one point to 49.9, slightly below its neutral threshold of 50, and the lowest level since November 2020. The backlog of orders index declined sharply by 6.1 points to 64.5 but is still well above pre-pandemic levels.
  • The Conference Board Consumer Confidence Index increased 7.3 points in June to 127.3, the highest level since February 2020, just before the COVID-19 pandemic. The index measuring consumer confidence in the present jumped by 9.0 points to the highest level since March 2020. Consumer expectations increased by 6.1 points, mostly recovering from the decline in May.
  • The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, increased 8.0 percent in May to 114.7, rebounding from a weaker April reading and recording the highest reading in the month of May since 2005.
  • Private residential construction spending edged up 0.2 percent in May, according to the Census Bureau. New single-family housing construction increased 0.8 percent for the second straight month, while multi-family construction was essentially flat. Spending on improvements dropped 0.6 percent.
  • The FHFA Purchase-Only House Price Index, reported on a seasonally adjusted basis, increased 15.7 percent from a year ago in April, continuing the record-breaking streak that began in November 2020.
Forecast Impact:

The strength in the June jobs report is a welcome sign following the weaker-than-anticipated reports of the last two months and suggests to us that some of the reported labor shortage issues may have started to ease. Some gains in June may have also been overstated due to a distorted seasonal pattern, such as private and public education, but strength in other categories, such as retail trade and leisure/hospitality, continue to highlight the reopening effort. However, there are still some signs of weakness, notably the labor force participation rate, which remains considerably below the pre-pandemic level, as many persons are still hesitant to return to the workforce. However, the number of persons who voluntarily quit their jobs increased by 164,000 in June, the largest increase in this category since last September, and a strong signal of confidence in the labor market. Also, while a positive sign for workers, average hourly earnings grew at a vigorous 3.6 percent year-over-year pace, but we believe this could exacerbate pricing pressures currently present in the economy. Taken as a whole, the report is consistent with our current forecast of an acceleration in employment gains in the near term and continued declines in the unemployment rate. 

Supply chain issues continue to weigh on economic activity, however. The decline in light vehicle sales is likely a result of supply chain disruptions, as the industry struggles to contend with the shortage of semiconductor chips. While this will likely lead us to decrease our estimate for consumer spending in Q2, the jump in June consumer confidence suggests that the decline in auto sales is not indicative of a downturn in broader consumer activity, and will likely improve as the semiconductor shortage improves. Supply chain disruptions for other materials are also driving up prices for manufacturers, and contraction in the employment index suggests that the manufacturing industry appears to be facing labor shortages like other sectors. We believe this could weigh on business investment in the future, but for now the ISM Manufacturing index remains comfortably in expansionary territory, supporting our outlook for solid business investment in Q2.

In housing, the large increase in pending home sales is likely in part a correction from the weaker-than-expected readings in the prior two months, and is unlikely to significantly impact our outlook for existing home sales. We expect the tight inventories of homes for sale and the continual rise in home prices pressuring affordability to lead to some further near-term softening in sales.

Ricky Goyette and Nathaniel Drake
Economic and Strategic Research Group
July 2, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.