Where Will the Economy Find 10 million Lost Jobs?

Summary

• Another month, another downbeat labour market report.
• Yet recovery need not be distant. Most of the pain was focused in the leisure/hospitality sector and healthcare/social services. Excluding those sectors, private payrolls grew by 146,000.
• Nearly two thirds of the 10 million job losses are concentrated in the leisure/hospitality, healthcare (exc. COVID healthcare!) and education – all sectors that should bounce back as the economy reopens fully.

Market Implications

• Equity valuations might look rather high. But the combination of low rates, continuing QE, major fiscal stimulus and the likelihood of an infrastructure program all support equities at this point in the cycles.
• Investors looking for ETFs that should do well in the recovery should consider PEJ and JETS (leisure and hospitality) and PKB (infrastructure).

Glass Half Empty?

The headline January labour market report was another downer – private payrolls rose a scant 6,000 versus the consensus forecast of a 50,000 gain. On top of that, people unemployed for more than 26 weeks rose 3 percentage points to 39.7%.

Glass Half Full?

Still, the underlying detail also gives reason to anticipate a sharp improvement in the job market in 2021.

The forecasts probably reflected expectations that the $900 billion stimulus bill signed into law in late December would have already started working its magic. But the January labour market survey was completed during the week of 11 January – too soon for most businesses and people to receive and act on stimulus benefits. The new stimulus should start showing up in the February job report.

The overall job report was depressed by job losses of 140,000 in three subsectors alone: retail trade, leisure and hospitality, and healthcare/social assistance. These of course are exactly the sectors hit disproportionately by renewed social restrictions to limit COVID’s spread. Excluding these sectors, the private sector actually gained 146,000 jobs. As we wrote last month, the labour market is indeed sprouting green shoots.

Looking at the big picture, it becomes a question of whether the glass is half full or half empty. We prefer to focus on the former. Despite the pressure from rising COVID infections and deaths that are far higher than last spring, the US economy and labour market is not falling into another precipitous decline.

About Those 10 million Lost Jobs…

There is still the unfortunate fact that the economy has lost 10 million jobs since the peak in February 2021, or 6.5%. Add in the 3.5% unemployment rate at that time and the effective unemployment rate is 10%. From 30,000 feet that looks like a very deep hole, one similar to the 2008-09 recession – and we know how long it took to recover from that.

But a closer look at the distribution of job losses shows that they are disproportionately concentrated in a few sectors. Table 1 summarises job losses by key sectors. True, this is a lot of numbers, but anyone wondering where a labour market recovery will come from would do well to review it carefully. It turns out that four sectors account for nearly two thirds of lost jobs, all of which should substantially recover as the economy fully reopens.

• The largest by far is the leisure and hospitality industry, which alone accounts for 39% of lost jobs.
• Education/health services covers private education and health-related services that are not COVID-related, and it accounts for 13% of lost jobs.
• Next is the education sector of government for 10% of lost jobs. Most of these will return as schools reopen.
• The retail sector accounts for about 3.1% of lost jobs, but virtually all of this is in the clothing and clothing accessories subsector. We would expect people to resume buying clothing as they can socialize more.

It is also worth noting that the goods-producing sector accounts for 9.3% of lost jobs. The subsectors that account for most of this – construction, manufacturing and transportation – will benefit from any infrastructure program that the Biden administration and Congress can implement.

Positioning for Recovery

From our standpoint, the labour market is positioning for a solid economic recovery later this year. While we acknowledge equities are trading at aggressive valuations, we still think it makes sense to be long equities and risk at this point. The combination of low rates, ongoing QE by the Fed, major fiscal stimulus to address the coronavirus economy and the prospect of an infrastructure program all point to a highly supportive environment for equities.

At this point in the cycle we favour ETFs that will benefit from rebounds in the beleaguered leisure and hospitality sectors and infrastructure (Chart 2). PEJ tracks the broader leisure sector and JETS is a pure play on the depressed airline industry. Both have lagged the S&P 500 index over the past several years. PKB is a broad-based construction and engineering ETF that will benefit from any infrastructure program. It has tracked the S&P 500 over time and has performed well since the March 2020 low, so this may be a more patient trade.