Inside the US Job Market

Jack Ablin Market Commentary

Last Friday’s jobs report was a stunner: the US Labor Department announced employers added 2.5 million net new jobs in May, our nation’s best single monthly job report in history. Most surprised by the news were US economists, who as a group had forecast 7.5 million job losses for the month, the biggest forecasting miss in history. May’s job gains reflected the benefits of reopening the economy. More than half of the 1.3 million workers rehired were in the food and beverage sector, as an increasing number of bars and restaurants rolled out welcome mats. The construction sector added nearly 500,000 jobs.  However, state and local governments, whose budgets are bearing the brunt of the shutdown, shed nearly 400,000 workers. The hotel sector cut another 148,000 jobs as Americans put off business travel and vacation plans.

Notwithstanding the uptick, the job market remains mired in COVID-19 uncertainties, particularly for minorities. Hispanic men, many of whom are employed in the hospitality sector, suffered the biggest reversal in employment conditions in recent months – joblessness among Hispanic men came in at 15.1 per cent, after having dipped to 3 per cent as recently as December. The unemployment rate among black men aged 20 years old and older, which had been as low as 5.1 per cent in November, spiked to 15.5 per cent.

At 13.3 per cent, America’s headline unemployment rate understates what’s really happening. The U-6 unemployment rate is a better measure. It takes the traditional unemployment rate and adds the share of “discouraged” and “marginally attached” workers. It also adds the population of workers who are part-time for purely economic reasons – in other words, those workers who hold part-time jobs who would like to be working full-time. The U-6 unemployment rate is at 21.2 per cent, its highest level in nearly a century.

Although 2.5 million net new jobs are something to be thankful for, this pales to hole we dug in March and April. In fact, every previous labor market drawdown since WWII pales in comparison to the pandemic pullback. Prior to the 2008 financial crisis, virtually every recession was coupled with job losses totaling between 2.5 per cent and 4.5 per cent from peak to trough and jobs were restored to their pre-recession levels in 18-24 months. The financial crisis was different in terms of its magnitude and duration. The labor market shrank by more than 6 per cent and it took 6.5 years to get back to even.  The COVID-19 crisis wiped out more than 14 per cent of the labor market in two months. Getting 30 million employees back into the workforce could take a decade.

Job openings, perhaps vestiges of the pre-COVID-19 labor market, remained steady through April, according to the Bureau of Labor Statistics (BLS). Its most recent report shows one million open positions in education, more than 800,000 in professional and business services and about 800,000 in trade, transportation and utilities. It is Interesting to note the BLS data also list 454,000 openings in the leisure sector, albeit about half the level at the beginning of the year. Most sectors, though, saw a reduction of job openings in April, with leisure suffering a 32 per cent decline. Construction, the standout, experienced a 7 per cent increase in job openings last month. The number of job openings reminds us that employers from all sectors are looking to hire. The unprecedented job market reversal was prompted by an exogenous crisis but the underlying business sector and financial market were strong pre-pandemic.

The pace of the recovery depends on getting sidelined workers back on the job and maintaining income support for those sidelined at home. Extending paycheck support from Congress is a critical factor. The blowout jobs report may sap some of the enthusiasm among lawmakers to keep cutting checks. In an odd juxtaposition, Republicans may have an appetite for keeping government spending in place – and President Trump perhaps even more so than many of his congressional colleagues. He faces reelection in November, and COVID-19 has led to the largest number of job losses ever on his watch. A moribund labor market represents the biggest threat to retaining his job this fall.

Several other headwinds are buffeting a speedy labor market recovery. Safety is a paramount concern. Employees are understandably worried about their safety and may be reluctant to return to work, particularly in close social settings like restaurants, hair salons and doctors’ offices – especially if they’re earning more staying home. Thanks to the $600 per week Federal supplement, nearly half (46 per cent) of unemployed Americans surveyed by The Morning Group say that their current unemployment benefits are either “significantly more, somewhat more or about the same” as their previous salary.  Federal unemployment benefits are set to expire in July. A recent University of Chicago study offers a sobering view, concluding that more than 40 per cent of layoffs caused by the pandemic will become permanent job losses, as many small businesses will not survive an extended period of depressed business conditions. Recovery in demand is not a certainty: despite the reopening, nearly three-quarters of Americans surveyed are reluctant to venture out to restaurants, to travel or to gather in groups. Moreover, operating at 25-50 per cent capacity is an unsustainable business strategy for the more than one million bars and restaurants in the US, potentially rendering as many as 40 per cent of them insolvent. The sector’s collective payroll last month accounted for 8 million employees, down from over 12 million at the same time last year.

The unprecedented hollowing out of the job market will undoubtedly have longer-term economic ramifications, even as the recovery ensues. It took over six years to recover the nearly nine million jobs lost in the financial crisis.  Restoring 30 million jobs could potentially take longer, as buying behaviors, preferences and work habits change. Other dominoes are falling, too, as companies outside sectors directly affected by the lockdown have announced layoffs, suggesting that the forced closure of travel, restaurants and related industries is beginning to ripple out into demand shortages in other parts of the economy. Companies as disparate as Chevron, IBM and Office Depot are reducing staff. Unlike traditional economic downturns, the pandemic crisis simultaneously affected both demand and supply.  Our global “just-in-time” supply chains were broken and must be repaired, but this task will be increasingly challenged by the fraying relationship between the United States and China.

Similarly, the linkages between borrowers and lenders most be reconciled in a period in which economists anticipate unprecedented defaults.  It is expected that defaults this year due to the pandemic-induced crisis will eclipse the $340 billion debt failures endured in the financial crisis. JP Morgan, Bank of America, Wells Fargo and US Bank collectively had already reserved $25 billion for loan losses as of the end of Q1. The legal blowback of untangling debt defaults could also slow the recovery. The Congressional Budget Office expects the global COVID-19 lockdown will cost the US economy $15.7 trillion over the next decade, due to lost economic activity and deflationary forces that reduce prices.

We evaluated several consumer-oriented industries by density (in other words, perceived safety) and discretion (the perceived necessity of engagement. Low-density activities, like grocery shopping, are perceived to be safer than high-density activities, like riding in public transportation. Deciding to visit the doctor is less discretionary than attending a sporting event. We anticipate low-density, low-discretionary services, like hair salons and visits to the doctor, to recover first, possibly within a matter of weeks. Next will likely be low-density, discretionary services, like restaurants and recreational activities, recovering within a few months, followed by high-density, low-discretionary services, like education and day care, by early next year. Last are high-density, high-discretionary activities, like air travel and sporting events, which may not fully recover until herd immunity is achieved either with an effective treatment, a vaccine or a large enough share of the population has been exposed and recovered. Activities like international air travel and attending a sporting event may not recover until this time next year.