River

summary

  • The Jobs Data Doesn’t Add Up
  • Yes, Brexit Is Still An Issue
  • Frustration For Food Producers

Some dieters have experienced something called “sugar shock.” Certain weight loss plans recommend abstaining from any sweetened food for weeks at a time. When the dieter tries a dessert after the long break, the sweet taste feels overwhelming.

So it was with last week’s U.S. employment report. After a long series of record low economic reports and downward forecast revisions, it was sweet to see positive job creation and a decline in the unemployment rate. Once the shock wore off, we turned to digesting the results. Our initial impressions follow.

Dour expectations for the job situation had been driven, in part, by the weekly flood of initial claims for unemployment benefits. A total of 44 million initial claims have been filed since mid-March, equivalent to 28% of the labor force.

Weekly Economic Commentary - 06/12/20 - Chart 1

The unemployment rate is obviously not that high. The link between unemployment insurance claims and the unemployment rate is not straightforward. Claimants frustrated by processing delays (state unemployment systems have been overwhelmed) may have applied more than once, while others may have been found ineligible. The number of continuing claims, people actually receiving unemployment, stood at 20.9 million as of the week of May 25. This represents only about 13% of the labor force.

But this latter figure may be a low estimate of unemployment, because many states remain behind in their processing. A recent Bloomberg study estimated that state governments have yet to grant unemployment benefits to more than one-third of claimants.

Some who have filed for claims over the past three months may already be back at work. That was the source of the surprise. Through the early weeks of May, COVID-related restrictions were relaxed and businesses began to reopen. Consumers cautiously (and in some cases, carelessly) returned to shops, bars and restaurants. High-frequency indicators like airport security screenings and gasoline sales suggest the peak of the slowdown passed in April. The return to employment began earlier than anticipated.

“Good news is welcome, but employment remains deeply depressed.”

A view of the sectors that surprised most significantly in May confirms this hypothesis. Workers in retail, hospitality and healthcare led the re-hiring. These discretionary sectors slowed the most in the lockdown, and they have been the first to bounce back. This surge may count as an early win for the Paycheck Protection Program (PPP). Small businesses that received PPP loans needed to return to their pre-crisis staffing levels by June in order for their loans to be forgiven. While data specific to PPP borrowers is still forthcoming, it may help to explain some of the gains.

Weekly Economic Commentary - 06/12/20 - Chart 2

Less encouragingly, government employment saw a substantial decline last month. Most state and local budgets were thin entering the crisis, and the precipitous drop in sales and income tax revenue has damaged public finances. Many local governments have responded by cutting headcount with a severity not seen in past downturns. This comes just as demand for local government services is rising, especially amid a public health crisis and pockets of civil unrest. Support for state governments will need to be a priority in upcoming fiscal policy debates.

May’s unemployment rate, while improved, remains an understatement. The jobless rate emerges from a survey filled out by households; the response options can sometimes be confusing. There has been a surge of nearly five million workers who were reported as employed but absent from work for “other reasons.” Those in this category are not counted as unemployed.

Most of these respondents must be facing disruption due to COVID-19. Survey takers should have marked these workers as being on a temporary layoff, which would increase the unemployment rate by about 3%. This issue was also present in March and April, and the Bureau of Labor Statistics (BLS) made the discrepancy clear in their press release.

Further, more than six million people have left the labor force since the start of the year. This may also be a product of classification problems related to the survey, as many of these workers remain in need of employment. While the American unemployment rate fell at all levels last month, functional joblessness is still dangerously close to 20%.