Last Friday’s August labour market report had elements of both glass-half-full and glass-half-empty news. On balance, the half-empty glass still looks bigger than the half-full one. But it is also quite possible that the half-full narrative continues to drive the near-term outlook for the economy and labour market. That raises the risk that Congress will not be able to agree on a robust stimulus package before the election and the recovery stalls.
The Economy Was Still Reopening in August
On the positive side, businesses clearly continued to reopen and recall workers in August. The headline payroll report was up by 1.4mn, and the broader household survey rose by 3.8mn workers. In recent years, the establishment payroll employment has run about 96% of total employment, with the difference mostly due to farm, gig and freelance workers (Exhibit 1). When the coronavirus lockdowns hit, the payroll percentage moved up to 97%, implying that non-payroll workers took the bigger hit. But the payroll share dropped back to 96% in August, as non-payroll workers returned to work. Our best guess is that many were able to reengage as businesses reopened, while others were probably responding to the loss of the $600 per week supplemental unemployment benefit.
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Last Friday’s August labour market report had elements of both glass-half-full and glass-half-empty news. On balance, the half-empty glass still looks bigger than the half-full one. But it is also quite possible that the half-full narrative continues to drive the near-term outlook for the economy and labour market. That raises the risk that Congress will not be able to agree on a robust stimulus package before the election and the recovery stalls.
The Economy Was Still Reopening in August
On the positive side, businesses clearly continued to reopen and recall workers in August. The headline payroll report was up by 1.4mn, and the broader household survey rose by 3.8mn workers. In recent years, the establishment payroll employment has run about 96% of total employment, with the difference mostly due to farm, gig and freelance workers (Exhibit 1). When the coronavirus lockdowns hit, the payroll percentage moved up to 97%, implying that non-payroll workers took the bigger hit. But the payroll share dropped back to 96% in August, as non-payroll workers returned to work. Our best guess is that many were able to reengage as businesses reopened, while others were probably responding to the loss of the $600 per week supplemental unemployment benefit.
Another plus is that the gain in total employment was due to unemployment declining by 2.9mn people and nearly 1mn people re-entering the labour force and getting jobs. To fully heal, the labour market needs to keep improving on both fronts.
A final plus is that decline in temporary unemployment is coming mostly from people returning to work. Unemployment due to permanent layoffs and people entering the labour force has been relatively constant for the past three months now (Exhibit 2). The economy may be recovering more slowly than most people hoped six months ago, but, to take the glass-half-full perspective, temporary layoffs are not turning into permanent layoffs. This keeps alive the prospect that they will return to work and that the economy will normalize. The equity market has certainly hewed to that narrative, rallying in the face of any new development since the March low, whether positive or negative.
And on the Glass-Half-Empty Side…
There is the obvious point that equities did not manage to rally on news of the steadily improving labour market. Granted, equities recently have been under extraordinary technical pressures from large option trades and could respond more strongly to the improving labour market as these factors dissipate.[1]
A second point is that the unemployment situation is worse than the official statistics imply. We have highlighted in previous articles that one extraordinary feature of this recession is the collapse in the labour market (Exhibit 3). In every previous post-war recession (including the GFC), labour force growth slowed or stalled but never outright shrank; in this cycle, however, it shed 8.1mn workers (or 5%) between February and April. We have strongly argued that most of the people were excluded from the labour force due to coronavirus and lockdown factors and would otherwise have been in the labour force looking for work.[2] That a quarter of the rise in employment was due to people re-entering the labour force effectively proves this point.
Accordingly, we calculate a proforma unemployment rate by adding these people to the labour force and total unemployment (Exhibit 4). The unemployment rate rises from 8.4% to 10.4%. The silver lining (as noted above) is that structural unemployment has remained stable near 7% so far. Structural unemployment is total unemployment less temporary unemployment. Historically, structural unemployment has recovered much more slowly than temporary unemployment, often taking years to return to normal levels. During the GFC recession, structural unemployment rose to 8.5% and took until December 2016 to fall below 4%.
Apart from that, the fact remains that the economic recovery has been far slower than anyone expected six months ago. The CARES Act was largely set to expire by the end of July because in March legislators and economists believed that would be sufficient stimulus to carry the economy through the worse of the coronavirus pandemic. But the short of it is that, between labour market slack and unemployed people, the economy still needs to replace about 11.4mn workers for the labour market to return to pre-Covid levels.
Glass-Half-Full Narrative May Inhibit Further Fiscal Stimulus For Now
The reality is that Covid is still very much with us. Weekly new infections are running about 285,000, and the weekly death rate is in the 6,000 to 6,500 range. There are widespread concerns that both will rise as cooler weather pushes people inside and flu season sets in. It will be difficult for economic activity to return to normal until the coronavirus infections subside significantly. And that means further recovery in the labour market will be gradual.
How gradual may depend on whether Congress comes through soon with a significant fiscal stimulus package that could keep consumers and state and local governments afloat until the coronavirus abates (whether due to a vaccine or natural causes) and the recovery gains momentum. The Fed has made it clear that fiscal support will be essential if the labour market and economy are to continue improving.
As things stand now with the loss of CARES unemployment benefits, many people are curtailing spending, and some will end up homeless. This in turn will be a drag on consumer spending and will further hamper any economic and labour market recovery unless more support is forthcoming. And it raises the risk that temporary unemployment morphs into permanent unemployment.
So far, Republicans and Democrats have been far apart. The Democratic-controlled House passed a $3tn stimulus bill in May, but Senate Republicans have generally refused to consider anything above $1tn. Many of them believe the $600 weekly supplement served as a disincentive to work. As it happens, the glass-half-full narrative of the August employment report provides some support for their case.
A soft August labour market report might have jolted reluctant Republicans into holding their noses and coming to some accommodation with Democrats. Instead, Republicans are now reportedly readying a stimulus bill that would total about $500-600bn. It seems hopeless, but it is possible that the sausage-making factory that is Washington politics will come up with something.
It is also possible that Congress will default to an alternative strategy – do nothing for now and let the voters decide on 3 November. Should that scenario become a reality, any further improvement in the labour market is likely to go from gradual to glacial.
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According to news reports, Softbank has recently been putting on large long call positions in various individual stocks particularly in the tech sector. Dealers have hedged short positions by buying stocks. Late last week some of these option positions were unwound, leading to a sharp selloff in equities. ↑
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To be included in the labour force (and counted as unemployed) The Bureau of Labor Statistics requires that an unemployed person have been actively looking for a job in the past four weeks. ↑
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.)