US points the way to Delta struggle on jobs that Australia too will face

Reserve Bank governor Philip Lowe believes the economic impact from our current wave of Delta-variant infections and lockdowns will be “temporary”. On Thursday we’ll get the first evidence of the unemployment impact on the August jobs report.

If the United States is any guide, there will be ample evidence that Delta will have significant and ongoing effects on employment — enough to suggest the working theory that reopening will offer another 2020-style jobs bounce-back in jobs may be seriously flawed.

The RBA had forecast GDP to grow 4% by December this year, but after growth of 2.5% in the first half of the year, the current slump — forecast to be about 3% to 4% for this quarter — that plainly won’t be met.

Instead, as Lowe suggested in last week’s post-meeting statement, the stronger growth forecast for the second half of this year will be delayed into the second half of 2022. “In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year,” he said.

But what is Delta doing to an open economy? The latest US August jobs report showed 235,000 new jobs — less than a third of the 730,000 forecast from the market.

According to the Bureau of Labor Studies (BLS), 1.5 million people not in the labour force indicated in the survey that they did not look for work because of the latest Delta infections across parts of the US. That non-participation effect saw the unemployment rate drop to 5.2% from 5.4% in July.

We’ve already seen a similar effect here as people gave up looking for work during the Sydney and Melbourne lockdowns, pushing the participation rate, and thus the unemployment rate, below what it would otherwise be.

As well, the BLS reported that “5.6 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic — that is, they did not work at all or worked fewer hours at some point in the last four weeks due to the pandemic. This measure is up from 5.2 million in July”.

Non-farm employment in the US has risen by 17 million since April 2020 but is down by 5.3 million, or 3.5%, from its pre-pandemic level in February 2020. Up to the latest lockdowns in Australia, our total employment was above the pandemic lockdowns at the start of 2020. So Delta continues to delay a return to pre-pandemic employment levels in the US just as it will delay a return to stronger growth here.

The US, despite being miles ahead of Australia in its vaccine rollout, has much higher rates of vaccine hesitancy. Texas, where the vaccination rate is still under 50%, has as many deaths as during the 2020-21 winter season. Florida, where 55% are vaccinated, has its biggest death toll of the entire pandemic.

The Delta effects on Australian employment should be proportionately lower, but will still be marked.

ABS payrolls data showed a fall in the first two weeks of August after dropping from mid-June as the impact of the lockdowns bit deeper, especially in NSW. Thursday will provide a better indication — not so much via the headline rate as the overall number of jobs and participation.

And tomorrow Lowe will deliver a major speech: “Delta, the Economy and Monetary Policy.” As always, his words will be carefully parsed to check for changes in the RBA’s thinking.