We note the following caveats in assessing the numbers:
- the absolute data are bad and worse than suggested by the headline number.
- this is really about labour demand in a sub-set of the economy and in particular restaurants.
- loan forgiveness might be playing a role in driving demand.
We are concerned that extrapolating forward from a better-than-expected jobs report in May to an even better June and July and so on might be precisely the wrong conclusion.
Keeping things in perspective
If economic activity is resuming faster than we expected, we should probably also expect the extent of social distancing to diminish. That is, people will start coming into close contact with others each day.
If the appropriate public hygiene standards are not being observed and the proper public health measures are not in place (e.g., effective testing, rapid contact tracing and water-tight quarantine controls), we should expect the virus to start to spread again.
So, if the economy is emerging too fast from lockdown, the risks of a second wave are surely increasing. Research suggests that the virus was not under control in large parts of the US in mid-May. We share the Surgeon General’s concerns that the mass protests over the death of George Floyd are likely to lead to new hot spots.
Absolutely dire jobs numbers
A second wave of the virus potentially represents the biggest downside risk to activity and asset valuations. So we struggle to get too excited about these jobs numbers.
Indeed, it is important to emphasise the absolute numbers. The US non-farm economy has lost around 19.5 million jobs since February, whereas the peak to trough fall in the 2008-2009 Global Financial Crisis was less than half: 8.5 million.
At 13.3% and 21.2% respectively, the unemployment and under-employment rates are far above anything seen during the GFC.
In other words, the US labour market was still extremely depressed in May.
Case in point: The restaurant sector (8% of all jobs)
The pattern of job losses and gains across sectors is insightful. Looking at sectors reporting job increases and those posting declines, the balance was poor in March and dire in April, but May’s was a perfectly respectable reading. This led one analyst to conclude that “job gains were fairly broad-based”. Yes, but only up to a point.
Looking at how many jobs each sector added back in May, the employment growth looks less broad-based. Most sectors have stopped shedding jobs. Those that shed the most jobs have started hiring back. Take restaurants. The industry accounted for more than a quarter of national job losses between February and April, and almost half of the US job gains between April and May.
Who was hired back?
The surprising weakness of average hourly earnings, which fell by 1% on the month (relative to expectations of a 1% increase), suggests that it was disproportionately low wage workers who were being added back to the workforce.
The decline in unemployment can be more than accounted for by the fall in the short-term unemployed (those out of a job for less than 15 weeks). The number of people who became unemployed thanks to a permanent job separation actually rose on the month – by around 300 000 people.
Counting those temporarily laid off
Technically speaking, to qualify as ‘unemployed on temporary layoff’, a person must have been given a date to return to work by their employer or must expect to be recalled to their job within six months (and be available to return if recalled).
To tackle this problem, interviewers compiling the statistics were encouraged to err on the side of recording those laid off due to the virus as temporary – even if the individual was unsure when they would return to work.
Unfortunately, the result has been that millions of people were not being correctly classified as unemployed. In other words, the data overstate the level of employment and understate the level of unemployment.
Companies hired back workers to qualify for debt forgiveness
At the risk of sounding cynical, we think there is a further reason why employment might have been strong: the Paycheck Protection Program. This is a scheme which provides incentives for small businesses to not shed workers.
The Small Business Administrationis willing to forgive the loans extended through the scheme – that is, transforming them into grants – if companies agree not to cut jobs or wages and the lion’s share of the loan is spent on the payroll.
With the big increase in take-up of PPP loans through April, it is plausible that companies have hired back individuals who were temporarily laid off to qualify for debt forgiveness under the PPP.
This is not necessarily a bad thing. Our point is simply that one should not confuse an increase in hiring to quality for debt forgiveness with genuine demand driven by a more optimistic assessment of the economy. The PPP could thus be one factor why the sectors that shed workers aggressively have been hiring them back so keenly.
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