As we expected, the November labour report portrayed a US economy that has lost all the forward momentum gained from summer’s post-lockdown reopening. Among the lowlights:
Private payrolls rose 245,000, considerably below the 450,000 consensus. Even that spot of good news was partially offset by a 74,000 drop in the broader household survey of employment (which includes farm workers and gig workers/freelancers who are not payroll employees).
The official unemployment rate dropped 0.2pp to 6.7%, but that was because unemployed people dropped out of the labour force.
The labour force shrank by 400,000, causing the participation rate to drop 0.2% to 61.5%. The labour force participation rate has meandered in a tight range since June, after recovering from a low of 60.2%. It remains far below February’s level of 63.4%. More to the point, 4.1 million people who were working early in the year remain on the sidelines.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- The November US labour report was dismal, portraying an economy verging on a double-dip recession.
- Every key metric worsened or came in far below expectations. Labour force participation fell, structural unemployment rose, and long-term unemployment spiked.
- Temporary unemployment fell by 441,000 – but mostly because people simply dropped out of the labour force.
- The silver lining is that these developments could push Congress to pass stimulus legislation.
Market Implications
- Markets rallied on hopes for another round of stimulus and the prospect of a rapid return to normal activity once vaccines become widely available.
- Should Congress not deliver or the recovery turn sluggish, equity markets could be in for a reckoning – but that day is probably still months away.
As we expected, the November labour report portrayed a US economy that has lost all the forward momentum gained from summer’s post-lockdown reopening. Among the lowlights:
- Private payrolls rose 245,000, considerably below the 450,000 consensus. Even that spot of good news was partially offset by a 74,000 drop in the broader household survey of employment (which includes farm workers and gig workers/freelancers who are not payroll employees).
- The official unemployment rate dropped 0.2pp to 6.7%, but that was because unemployed people dropped out of the labour force.
- The labour force shrank by 400,000, causing the participation rate to drop 0.2% to 61.5%. The labour force participation rate has meandered in a tight range since June, after recovering from a low of 60.2%. It remains far below February’s level of 63.4%. More to the point, 4.1 million people who were working early in the year remain on the sidelines.
- Temporary unemployment dropped by 441,000. But few if any returned to work. Most simply dropped out of the labour force, and the remainder transitioned into permanent unemployment.
- Our measure of the true unemployment rate, which assumes that people who dropped out of the labour force would be working or looking for work were it not for the extraordinary circumstances of the coronavirus pandemic, rose 0.1% to 9.5% (Chart 1).
- Structural unemployment, which we define as unemployment minus temporary unemployment, edged up 0.1% to 4.9% based on official data. But our true measure rose 0.3% to 7.8%.
- Long-term unemployment, defined as 27 weeks or more, jumped by 385,000 – making 2.3 million since August. It is now 38% of total unemployment (Chart 2). The actual number and share would be considerably higher had people not dropped out of the labour force.
Do Markets Care?
As has become the norm since they bottomed in March, pandemic-infected markets simply shrugged off the mostly negative labour report. The S&P 500 rallied 0.88%. One can only wonder how much more it might have rallied had labour markets managed to retain some of last summer’s forward momentum.
The near-term silver lining for markets is the prospect that the weak labour market report will push Congress to pass a larger stimulus package, and sooner.
There is also the hope that vaccines will allow the economy and social life to return to normal by summertime. In previous recessions labour market deterioration and recovery unfolded gradually over a period of years (see Chart 1). This time around the collapse and initial recovery happened within a few quarters.Who is to say the subsequent recovery will not resume at hyperspeed?
Should the economic hole keep getting deeper or the post-vaccine recovery pace turn out to be sluggish, markets may face a day of reckoning unless Congress keeps responding with additional rounds of stimulus.
Yet the reckoning – if it comes – is probably still months away.
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.)