September 3, 2021

A disappointing employment report showed the impact of the Delta variant on a previously-budding labor market recovery. Home purchase mortgage applications continue to register modest gains but pending home sales unexpectedly slipped in July. And spending on residential construction continues to soar due to increased activity and input costs that are sharply rising and showing few signs of slowing.

The U.S. labor market takes a big step back following two strong releases

• 235,000 jobs were added to the U.S. economy in August, the fewest in any month since January.
• The national unemployment rate fell 0.2 percentage points to 5.2%.

Leading indicators of home sales paint a blurry picture of the months to come

• The Mortgage Bankers’ Association’s index of home purchase mortgage applications increased 1% from last week, the third weekly improvement in four releases
• But the National Association of Realtors’ Pending Home Sales Index slipped 1.8% in July from June.

Home building and improvement continue to power construction spending

• Private residential construction spending increased 0.5% in July from June and is up 27% year-over-year, according to the Census Bureau.
• Spending on nonresidential construction has fallen by 4.2% over the last year.

So what? 

After taking big steps forward in June and July, the U.S. labor market stumbled in August as the Delta variant’s spread slowed the market’s momentum. Just 235,000 jobs were added to the economy last month – the weakest monthly increase since January, and considerably fewer than the 1 million average pace of the past two months. The underwhelming report did feature some encouraging news: The headline unemployment rate fell to its lowest level since the pandemic began while the labor force participation rate stayed flat, and the pace of wage growth in August was nearly double the average monthly pace through the previous seven months. However, a look under the hood reveals a labor market that is still recovering and now suddenly struggling to gather momentum. The number of people currently outside of the labor force who stated that they want a job fell by 12% from July, limiting the already-scarce supply of workers. Demand for workers remains very strong but it may have taken a step back in some sectors. Annual growth in leisure and hospitality wages slowed in August from July, suggesting that employers are less eager to hire workers than they were in recent months. Indeed, in perhaps the most glaring evidence of the Delta variant’s impact on the labor market, after adding 2.1 million jobs between February and July (half of all jobs added over that time), the leisure and hospitality sector failed to add any payrolls in August. Today’s report reinforced that the economy is going to continue to struggle to grow as long as COVID continues to spread.

Counterintuitively, mortgage rates trended higher following the disappointing jobs report, following the lead set by U.S. Treasury yields. The increase suggests that bond market investors, who are always looking ahead, view the poor jobs data as an indication that more fiscal stimulus is more likely than it was previously. But despite the slight uptick, mortgage rates remain very low and continue to provide an avenue for home shoppers who can afford down payments. Applications for home purchase mortgages have stabilized since falling sharply earlier in the year and the series rose again this week, increasing 1% from last week – the third weekly improvement in the last four releases. The MBA’s series is down 16% from the same week last year, but up 8% from 2019. The improvement in purchase applications was offset by another leading indicator of home sales, NAR’s Pending Home Sales Index, which unexpectedly fell slightly in July from June. Combined, the two releases suggest that home sales volume has leveled off since it retreated in recent months, with increased inventory providing some relief to buyers facing still strong price growth.

Spending on residential construction continues to soar, even as other construction spending remains grounded. According to the Census Bureau, spending on private residential construction – including new home builds and improvement done on existing structures — grew by 0.5% in July from June and is up 27% from July 2020. As a comparison, spending on nonresidential construction is down 4.2% from last year. The elevated pace of homebuilder activity in recent months and an increased propensity for many homeowners to renovate their homes in order to accommodate their changed housing needs have both contributed to the boom in residential construction spending. But another key contributing factor is the role of sharply rising costs of key building inputs. Prices and availability of many key materials, not to mention labor, have skyrocketed of late, and news this week suggests that the constraint won’t be getting better anytime soon. A survey from housing market research firm Zonda found that 93% of builders in August were facing supply chain issues – the highest share since at least April 2020, when the survey began. The finding adds more color to a slew of data indicating that global supply challenges persist as the world deals with renewed COVID-19 outbreaks and continues to catch up from slowdowns earlier in the year. The home construction industry has held up well in recent months despite mounting price pressures and supply chain challenges, and it will continue to be tested by these constraints in the months to come.

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