The labour market report hinted at the US economy’s underlying potential dynamism if (as we all hope) vaccines facilitate a more comprehensive reopening later this year. Payrolls were up by 379,000 workers, more than twice consensus expectations on little more than tentative efforts to generate more activity in the hospitality sector.
But the report also revealed just how deep the job-loss hole is – and not just because the economy is still down 9.5 million jobs relative to a year ago. Most of February’s gains came from recalling temporarily unemployed people. The labour force rose by only 50,000 people, so virtually no one left the sidelines (Chart 1). And about 100,000 temporarily unemployed people morphed into permanently unemployed.
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Summary
- Markets responded enthusiastically to the February labour market report. But on closer inspection, it was a bit short on substance. Most of the growth came from recalling temporarily unemployed people – the overall labour force has yet to resume growing.
- We anticipate that broader growth will emerge as vaccines are distributed and people start moving around more freely.
- But we caution that this will play out over coming quarters, not months. And there remains the risk of another spike in infections or that a variant coronavirus emerges that is resistant to current vaccines.
Market Implications
- We doubt markets are poised to resume a sustained rally yet.
- Rather, we expect markets will continue trading in a volatile range for now, until more green shoots of broader economic growth emerge and ongoing uncertainties about rates settle down.
The labour market report hinted at the US economy’s underlying potential dynamism if (as we all hope) vaccines facilitate a more comprehensive reopening later this year. Payrolls were up by 379,000 workers, more than twice consensus expectations on little more than tentative efforts to generate more activity in the hospitality sector.
But the report also revealed just how deep the job-loss hole is – and not just because the economy is still down 9.5 million jobs relative to a year ago. Most of February’s gains came from recalling temporarily unemployed people. The labour force rose by only 50,000 people, so virtually no one left the sidelines (Chart 1). And about 100,000 temporarily unemployed people morphed into permanently unemployed.
As a result, our structural unemployment measure ticked up from 7.6% to 7.8%, and the true unemployment rate fell only 0.1% to 9.1% (Chart 2).[1]
Recalling Temporarily Unemployed People Is Nearly Done
At this point, there are about 2.2 million temporarily unemployed people. During normal periods, there would be about 1 million at any one time due to seasonal hiring, factory retoolings, etc. If hiring continues at February’s pace, the supply of temporarily unemployed people will dry up within the next few months.
At the risk of stating the obvious, the labour market (and US economy) will not move to the next level until the labour force starts growing and structural unemployment falls steadily.
We are reasonably confident that this will indeed happen in coming quarters. The job losses are concentrated in a few human-interaction-intensive sectors, particularly hospitality and leisure, education and non-Covid-related health services (Table 1). As people receive vaccinations and become more confident about social interaction, it should become evident that much of this economic activity was dormant rather than outright dead. And given the emphasis on reopening schools, education sectors should bounce back between now and September.
Still, some caveats are warranted.
First, we are talking quarters, not months, for these more sanguine developments to take hold – although we should see green shoots in coming months.
Second, the timing could be delayed if there is another spike in infections (due either to a rush in some states to reopen or the rise of a more vaccine-resistant coronavirus variant).
Third, it remains to be seen whether President Joe Biden’s $1.9 trillion stimulus bill really stokes growth or serves more as a stopgap to keep the economy on life support.
Market Jury Is Still Out
Unsurprisingly, markets responded enthusiastically to the labour market report, with the SPX jumping 1.95%. But we doubt that it is a sufficiently strong platform to support another sustained market rally. More likely, investors will reconsider the lack of labour force growth in light of still-present risks and the uncertain rate outlook and will continue trading in a volatile range for now.
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Our measure of the true unemployment rate assumes the labour force is at the February 2020 level. The Labor Department does not include many unemployed people in the labour force because they cannot actively look for a new job due to the COVID pandemic. But most of them want to work and will presumably return to the labour force and employment as soon as they can. Structural unemployment is true unemployment less temporary unemployment. ↑
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.)