Chief Economist Scott Brown discusses current economic conditions.
The August Employment Report in Perspective
Private–sector payrolls rose by 1.027 million in the initial estimate for August. Normally, such a gain would be considered outstanding. However, in this recovery, that comes as a disappointment. The increase in jobs leaves us well short of where we were before the pandemic, and the pace of improvement appears to have slowed. In contrast to the establishment survey, the household survey showed significant improvement in August. However, the payroll data should be granted more weight.
The government added 251,000 temporary census workers in August, as expected, boosting the overall gain in nonfarm payrolls (+1.371 million). These jobs will be lost later. State and local government added 93,000, less than a third of that in education. Seasonal hiring in education will be more significant in September, and it remains unclear what effect the pandemic will have on the totals.
In the last four months, private-sector payrolls have recovered about half of the jobs lost in March and April. The major cyclical sectors (construction, manufacturing, retail) have done better, but are still not back to where they were. The job recoveries in transportation services, accommodations, entertainment, and restaurants have been slower going. Motion picture and sound recording payrolls are half of what they were in February. Payrolls in performing arts and spectator sports remain down 46%. Restaurants and bars have added 3.6 million jobs since April, but were down 6.1 million between February and April. A full recovery in these badly hit sectors isn’t going to occur until the pandemic is well behinds us, which won’t be anytime soon.
The unemployment rate surprised to the downside in August, falling to 8.4% (from 10.2%). The rate was expected to fall in August due to a decrease in labor force participation following the expiration of enhanced benefits at the end of July. Instead, the labor force increased by 968,000, while employment rose by more than 3.7 million. Hold on a second. Anyone familiar with the household survey knows that estimates of levels are unreliable. The household survey is based on only 60,000 households. A survey that small won’t yield accurate estimated of the labor force and employment, but it does give reasonable estimates of ratios, such as labor force participation and the unemployment rate.
Still, how does one explain August’s sharp drop in the unemployment rate, especially in combination with the more moderate gain in nonfarm payrolls? That’s unclear. However, it’s important to note that the reported unemployment rate understates the degree of labor market weakness in tough times. Over eight million people exited the labor force in March and April. To be counted as unemployed, one has to be actively looking for a job. Hence, those exiting are not classified as “unemployed.” To correct for this, one could simply look at the employment population ratio (56.5% in August, vs. 55.1% in July, 51.3% in April, and 61.1% in February. Alternative, one could extrapolate the pre-pandemic trend in the labor force (about +0.5% per year) – doing this would generate a 10.7% unemployment rate in August (compared to the reported 8.4%), down from 13.0% in July and 19.0% in April (and 3.5% in February). Even with this adjustment, the rate fell sharply in August. Sometimes, the household survey and the establishment survey are just going to differ, but the payroll figure should get the most weight.
The job outlook is important because jobs drive consumer spending, which accounts for 70% for Gross Domestic Product. The sectors exhibiting prolonged weakness in jobs are generally lower-paying industries, but for the households experiencing job losses, the consequences are dire. Many of these jobs are not expected to come back. The reallocation of workers over time is a difficult and painful process. Two hundred years ago, most jobs were in agriculture. After World War II, about a third of jobs were in manufacturing. It’s unclear what lies ahead, but the great success of the U.S. economy has long been its ability to reinvent itself.