Labor market nadir?
Bottom Line Due to the U.S. government’s decision to shut down the economy in March to contain the coronavirus pandemic and save lives, nonfarm payrolls plunged by 20.5 million jobs in April, with the unemployment rate (U-3) soaring to 14.7%, marking the single worst month for the labor market since recordkeeping began in 1939. While the labor market last month certainly suffered its largest collapse in U.S. history, the results were less bad than feared and may represent the painful trough of the employment cycle.
The Bloomberg consensus was expecting a loss of 22 million jobs with a 16% unemployment rate. Our models here at Federated Hermes told us to brace for an even larger loss of 25.7 million jobs and the unemployment rate skyrocketing to 20%. To put the stunning collapse into some historical perspective, the worst previous monthly losses were nearly two million jobs sustained in September 1945. The unemployment rate peaked at 10% in October 2009 during the Great Recession and at 10.8% in November 1982 during the double-dip recession. (During the Great Depression in 1932, unemployment was estimated to have hit 24.9%, but this was before official recordkeeping.)
Importantly, some 6.4 million people not working also stopped looking for work. The Labor Department now considers them to have dropped out of the labor force, which lowered the unemployment rate by an estimated five percentage points. To that point, the labor impairment rate (U-6), also known as the underemployment rate, registered a record high of 22.8% in April. That may be a better barometer of the depths of the jobs report. Additionally, the household survey lost a record 22.4 million jobs in April.
So amid this bloodletting, why do we believe there’s potential good news to this gruesome set of data? Because 18 million of those who lost jobs reported they are on temporary furlough and expect to be recalled by their companies when the government rescinds the mandatory shelter-in-place order for nonessential workers and begins to slowly reopen the economy in coming months. To be sure, not everyone will be called back to work, as some businesses may not open again, and reduced demand for other companies’ goods and services may dictate less rehiring. But the unemployment rate was at a half-century low of 3.5% just two months ago in February and the economy was quite strong before the exogenous shock of the coronavirus, creating the potential for a sharp rebound in the labor market in the second half of 2020.
The trajectory of initial weekly jobless claims may plot an instructive path. The survey week that ended March 14 posted a relatively normal 282,000. But claims spiked to 6.867 million only two weeks later on March 28, nearly 10 times the previous all-time record of 695,000 set in October 1982, as the coronavirus hit and the economy shutdown. Over the next five weeks, they have fallen by more than half to 3.169 million on May 2. So while the country has added a brutal number of 33.5 million initial claims over the past seven weeks, the trend is rapidly decelerating, which is good news.
In addition, the growth in average hourly earnings in April spiked to a record high of 7.9% year-over-year, more than double March’s solid 3.3% increase. While we don’t believe that’s sustainable, how is it even possible? Because there was a significant shift in the mix of job losses last month. Many more low-skilled and low-wage workers in retail and hospitality lost jobs than highly skilled and highly paid workers in other industries.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which Congress and the Trump administration put in place on March 27, offers emergency food stamps, makes direct payments to the bottom 90% of wage earners, extends unemployment insurance from 26 to 39 weeks and pays an extra $600 cash bonus per week on top of regular benefits for four months. Nearly 7.7 million leisure and hospitality employees and 2.1 million retail workers lost their jobs in April. With mandatory shelter-in-place orders, many employers furloughed their employees—letting them collect $1,000 per week for the next four months—and plan to bring them back when the economy recovers during the second half of 2020.
How did the equity market respond to this morning’s dreadful labor report? The S&P 500 surged nearly 2% Friday, capping a powerful 36% rally over the past seven weeks. As a forward-looking discounting mechanism, stocks appear to be looking through this dismal economic and corporate earnings news, to the potential for a powerful rebound in the second half of 2020 and beyond.