Author: Tom Cooley

By Thomas Cooley and Peter Rupert

The BLS announced nonfarm payroll employment increased by 2,509,000 in May. We won’t even mention what the expectations were heading into this report since no one really foresaw a rebound this quickly. The increase was the largest one-month increase in the history of the series after the largest one-month decline. The graphs below are, admittedly, quite bizarre. Most likely there are measurement issues and issues with seasonality. However, there can be no doubt that what we are observing today is far beyond the scope of anything we have seen in economic data…ever!

It isn’t time yet to declare a “V” shaped recovery, of course, but it is encouraging that the economy shows signs of adaptability as we begin to return to normal activity. It is still the case that most economists forecast that roughly 40% of jobs that were shut down will not come back.

Many of the jobs that were lost in April were ready to return once the government removed the restrictions. For example, service producing jobs increased 2,245,000 with leisure and hospitality rising 1,239,000. A friend of ours termed this a “synthetic” recession due to the fact that our economy did not put us in this mess…it was mandated by government in the interest of public health.

The rebound in employment was pretty broad based – jobs increased in most sectors.

Some of the increase in employment was the result of labor reallocation. Surveys indicate that for every 10 jobs destroyed since the onset of the pandemic, 3 new jobs were created. Retail jobs lost at Macy’s become new jobs at Walmart and Amazon. Reallocation is normal in recessions but we need way more than a three to one replacement rate to think about this as a recovery.

Average weekly hours soared from 34.2 to 34.7. With the return of many service sector workers, average hourly earnings fell from $30.04 to $29.75 due to the fact that these workers tend to be lower on the pay scale.

The household survey showed an increase in employment of 3,839,000 and an increase in the labor force of 1,746,000. The number of unemployed persons fell 2,093,000 leading to a decrease in the unemployment rate to 13.26 from 14.75.

Yesterday, initial claims showed lower, but still elevated, claims. It is useful to note that the actual number of claims are given by the not seasonally adjusted data, ICNSA, in the chart below. Given the clamp down in the labor market, many of the seasonally adjusted series will be somewhat misleading since the “seasonal” component is likely not useful in this current context. Nonetheless, both series show the same patterns.

The flow from employed to unemployed in April was staggering and the turnaround was also staggering. The not seasonally adjusted data is shown given the affects of seasonal adjustment on the current data.

Labor market “churn” is a distinguishing feature of the U.S. economy and the recent data bear this out. The surprising speed of this reallocation should not lull us into thinking that the economy will snap right back however. The retail sector was already on life support as were parts of leisure and hospitality. The pandemic is simply pushing them along faster. It also reveals weaknesses in other sectors like commercial real estate and higher education. As people discover new ways to organize work and learning the old business models are likely to be replaced.

These parts of labor force reallocation are going to take a long time to be realized and this suggests that recovery may seem swift initially but will have a very long tail.

By Thomas Cooley and Peter Rupert

The BLS released the November Employment Situation Report and it continued to show a robust economy that added +266,000 new jobs last month. Further, job growth for the past two months was revised upwards by +41,000 jobs. The end of the GM strike boosted employment in the auto sector by +41,300, but job growth was widespread and robust. There was a +60,200 increase in health care and social assistance.

Average weekly hours stayed at 34.4 for the fourth consecutive month. Average hourly earnings across all private non-farm jobs increased slightly and year on year average hourly earning increased by 3.1%. This is modest given the tightness in the labor market but well above PCE inflation.

In the household survey the BLS announced that the labor force participation rate fell from 63.3 to 63.2. Importantly, the participation rate for prime age workers (25-64) remained at 82.8%, its highest level sine 2009. The employment to population ratio remained unchanged last month.

The strong job market and steady wage improvement should continue to support the consumer spending that has kept the economy growing steadily. As with recent history, there is nothing evident here to support continued Fed easing at the next FOMC meeting. But recent Fed decision making seems to have been driven more by the view that the neutral rate of interest – the rate that supports the economy at full employment and maximum output without inflation – has fallen significantly. Nonetheless the market would be surprised by further Fed easing in the near future given the strength of the US labor market.

by Thomas Cooley and Peter Rupert

The BEA Announced the Advanced Estimate of Third Quarter GDP and it showed an economy still growing but moderating to 1.9%. Consumers continued to power the economy with personal consumption expenditures increasing by 2.9% and residential fixed investment increasing by 5%.

While consumers have remained positive and keep the economy humming, the worry for some time has been the about the impact of weakness in our trading partners and the ongoing trade wars on business and particularly on business investment. The latter reflects something about firms views of the future state of the economy. Business fixed investment slowed in the third quarter, although less than it did in the previous quarter. Inventories increased in the quarter and it may be that these will hold back production in future quarters.

Labor Report

The BLS announced that non-farm payroll employment from the establishment data increased 128,000 for October. On top of that there were very large upward revisions to August (up 51,000) and September (up 44,000) of a total of 95,000, making the labor market much stronger than originally reported.

The private sector added 131,000 while government shrank by 3,000. The decline in government employment was led largely by a federal government cut of 17,000, many of which were 2020 census workers. In addition, there was a 41,600 decline in the motor vehicles and parts category reflecting the recent UAW strike. Retail trade has shown two consecutive months of an increase, rising 6,700 in September and 6,100 in October.

Average weekly hours hours kept steady at 34.4 despite the decline in manufacturing hours. Average hourly earning were also up slightly.

The household survey also showed serious labor market strength with the labor force rising 325,000 and employment up 241,000. The labor force participation rate increased from 63.2 to 63.3. The unemployment rate inched up slightly from 3.52% to 3.56%.

Big Picture

It is not clear what is driving Fed decision-making and the communications have been woeful. Chairman Powell cited the desire for insurance against the impact of trade worries. It is unclear that such insurance works or why it would affect the investment decisions of firms. The Fed also signaled that it is finished with rate cutting for a while. Once again there is no hint at what “rules” they are following.

In a serendipitous bit of timing, the BEA’s Advanced snapshot of the U.S. economy in the third quarter was released on the same day that Fed announced it’s policy decisions from the October FOMC meeting. In a sign of concern they decided to cut rates yet again in spite of the signs of a strong U.S. economy. So much for “data driven” Fed decisions?