The US Labour Market Is Sprouting Green Shoots
- By John Tierney
- 2 min read
Last week’s US labour market data for December was actually more constructive than the headline decline in payrolls implied. Despite the growing Covid pandemic and renewed restrictions in many areas pressuring the economy, payrolls fell by only 140,000 – which would be fairly typical fluctuation during more normal times. Job losses were concentrated in the leisure sector, in particular restaurants and hotels, as people cut back on going out and travel due to renewed Covid restrictions. Meanwhile, broad swathes of the economy continued adding jobs. Goods producing industries added 93,000 jobs, and the service sector (exc. leisure) gained 352,000.
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Summary
- Underlying trends in the US labour market are promising.
- Outside of the leisure and food service sectors, the private sector is adding jobs and permanent unemployment is falling.
Market Implications
- This should support equity markets, though there remains uncertainty around vaccine distribution and the extent of further stimulus, which may cause some consolidation.
Latest US Employment Data Is Encouraging
Last week’s US labour market data for December was actually more constructive than the headline decline in payrolls implied. Despite the growing Covid pandemic and renewed restrictions in many areas pressuring the economy, payrolls fell by only 140,000 – which would be fairly typical fluctuation during more normal times. Job losses were concentrated in the leisure sector, in particular restaurants and hotels, as people cut back on going out and travel due to renewed Covid restrictions. Meanwhile, broad swathes of the economy continued adding jobs. Goods producing industries added 93,000 jobs, and the service sector (exc. leisure) gained 352,000.
Most Metrics Are Holding Steady
And the more structural dynamics of US jobs? The good news is that the US labour force participation rate was unchanged at 61.5%, and permanent unemployment fell by 348,000 to 3.4 million – the first meaningful decline since February. As a result, our measure of true unemployment, which assumes the labour force is at its February level, stayed steady at 9.4% and structural unemployment at 7.6% (Chart 1). Both should improve as the economy reopens.
The surest indication that the labour market really is healing would be a meaningful drop in long-term unemployment, or people out of work for more than six months. Historically, long-term unemployment has been slow to recover after recessions (Chart 2). But this time, many of the current long-term unemployed lost jobs due to Covid restrictions and will likely return to work quite quickly as businesses resume more normal activity.
Green Shoots Should Support Markets
For now, there are a variety of reasons to expect that the economy should do well in coming quarters even as the Covid pandemic continues to gather momentum. In the short term there is the $1 trillion fiscal stimulus package, which should provide roughly three to four months of life support. And there is the prospect of more in coming months now that Democrats control both houses of Congress. Then there is the vaccine, which offers hope of corralling the pandemic during 2021 and enabling the economy to reopen fully.
Timing is an issue. It remains to be seen how quickly the vaccine can be distributed, and what kind of fiscal support and infrastructure programs follow the current stimulus package.
We would be unsurprised to see the equity rally stall for a bit until there is more clarity on these points. But the combination of the outlook and ongoing green shoots in the labour market also suggests the markets will avoid any major selloff or correction unless or until something changes for the worse.
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.)