The consensus forecast for Friday’s labour market report is an increase in nonfarm payrolls of 500,000 and a modest 0.1% drop in the unemployment rate to 6.8%.
Other labour market indicators hint that it could come in a bit weaker. The latest ISM Manufacturing Index for November came at a robust 57.3, but the employment component dropped sharply to 48.4 (versus 53.2 in October). This is largely because the pandemic has made it difficult to hire people. The ADP private payroll report registered an increase of 307,000 jobs versus a consensus forecast of 410,000. And the recent weekly initial jobless claims reports have been coming in higher than expected.
Alternatively, if Friday’s report is in line with expectations, the headline numbers may well already be weeks out of date. Some of the underlying detail may shed light on how the labour market is faring.
We will be focusing on three datapoints in particular: labour force participation, structural unemployment, and long-term unemployment.
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Summary
- Early indications: November labour market report could either come in weaker than consensus forecasts or, if on the mark, already be weeks out of date.
- Underlying detail may provide more visibility on the near-term outlook.
- In particular, we watch to see if recent weak trends in labour force participation, structural unemployment and long-term unemployment continue or show signs of improving.
- We are bearish on the outlook for coming months, unless or until a significant stimulus package is implemented.
- Further out: if vaccines are widely available by mid-2021 and we return to normalcy, people may find employers anxious to put them to work.
The consensus forecast for Friday’s labour market report is an increase in nonfarm payrolls of 500,000 and a modest 0.1% drop in the unemployment rate to 6.8%.
Other labour market indicators hint that it could come in a bit weaker. The latest ISM Manufacturing Index for November came at a robust 57.3, but the employment component dropped sharply to 48.4 (versus 53.2 in October). This is largely because the pandemic has made it difficult to hire people. The ADP private payroll report registered an increase of 307,000 jobs versus a consensus forecast of 410,000. And the recent weekly initial jobless claims reports have been coming in higher than expected.
Alternatively, if Friday’s report is in line with expectations, the headline numbers may well already be weeks out of date. Some of the underlying detail may shed light on how the labour market is faring.
We will be focusing on three datapoints in particular: labour force participation, structural unemployment, and long-term unemployment.
Will Labour Force Participation Rise?
The coronavirus pandemic recession caused the labour market to collapse – something that never happened in any previous post-war recession (Chart 1). As of October, the labour force participation rate was 61.7%, down from 63.4% in February. That amounts to 3.8 million people now on the sidelines, neither working nor looking for work. For the broader economy and GDP to recover to pre-pandemic levels, labour force participation has to keep recovering.
To qualify for inclusion in the labour force, one must either be working or actively looking for a job. The unemployment rate in turn is calculated as the percentage of the labour force that is unemployed. That means those people sidelined by the pandemic are not considered unemployed even though they would surely be working or looking for work but for the extraordinary circumstances.
If the unemployment rate declines with labour force participation little changed or declining, we would consider that a negative for the near-term outlook. This is because it implies sidelined people have not re-entered the labour market. Likewise, if the unemployment rate rises because people are entering the labour force and looking for work, that suggests the recovery is picking up.
Will Structural Unemployment Decline?
One signature feature of the pandemic recession was a massive surge in temporary unemployment to 11%, followed by a rapid recovery (to 2%) as the economy reopened during the summer (Chart 2). Less noticed has been a steady rise in structural unemployment, from 3% in February to 4.9% in October. The good news is this is still considerably lower than after the 1990-91 and 2008-09 recessions.
It potentially gets worse. If we add in unemployed people who are not counted as part of the labour force, the structural unemployment rate rises to 7%. And to the extent that temporary unemployed workers morph into permanently unemployed, the structural unemployment could be higher.
Historically, structural unemployment has recovered far slower than temporary unemployment.
Any indication that structural employment is levelling off or, preferably, declining could be an indication that the prospects for the recovery are improving. Likewise, if structural unemployment continues to rise, the economic hole will only deepen.
What’s Happening With Long-Term Unemployment?
One bright spot in the weekly unemployment claims report is the steady drop in continuing unemployment claims since the summer, from 16 million in July to 6 million recently. During September and October, they fell by 6 million. But during that period, long-term unemployment (defined as more than 26 weeks) also rose by 2 million people. Roughly 4 million people returned to work; the rest remained unemployed, but their state unemployment benefits ended. Some were able to continue receiving benefits under the CARES Act Pandemic unemployment assistance programs, but these end later this month.
In the November labour report, we will learn how many people who started receiving benefits roughly between mid-April to mid-May (near the peak in initial unemployment claims) transitioned into long-term unemployment status and lost unemployment benefits. If the number continues to rise sharply it could motivate Congress to pass some sort of stimulus package in coming weeks. If it is on the low side, it could imply the labour market is in decent shape and perhaps lead to a smaller or less timely stimulus package.
Bearish Short Term, but Hopeful for 2021
On balance, we expect the headline labour report to be softer than consensus. And we expect no improvement in labour force participation, structural unemployment or long-term unemployment. Absent a robust stimulus package in coming weeks, these indicators will likely auger a grim winter for many people.
If there is any silver lining to be found, it may be in the ISM report. To the extent the employers are having difficulty finding workers to do the work (rather than work for workers to do), people may be able to return to normal lives and current labour market woes could improve quite rapidly when the vaccines become more widely distributed. That said, many people may be unable to return to their former jobs and will need time to retool for new occupations.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)