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Economic Research: U.S. Biweekly Economic Roundup: The Jobs Recovery Loses Momentum

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Economic Research: U.S. Biweekly Economic Roundup: The Jobs Recovery Loses Momentum

July BLS Jobs Report: Slowdown

The U.S. economy regained 1.8 million jobs in July--according to the Bureau of Labor Statistics' (BLS) jobs report--as more businesses gradually returned to normal operations. With a total of 9.3 million jobs recovered since the crisis, this rebound is a little more than fourth-tenths (42%) of the 22.2 million jobs collapse in March and April. Still, the pace of recovery lost momentum across broad industry groups given the impact of surging COVID-19 cases on commerce (see chart 1).

Chart 1

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That said, private payrolls (from the government report), at 1.46 million in July (8.2 million May through July), were dramatically larger than the surprisingly small 167,000 increase (7.8 million May through July) reported by the ADP private payrolls report. The two reports often aren't in line on a month-by-month basis, though a 1.29 million gap between the two releases is unusual by any stretch of the imagination. Over the long run, the reports do largely track each other. We'll be watching to see whether the BLS report will be revised down closer to the ADP report, or vice versa.

There were some real seasonality challenges in the report. The government's normal seasonal adjustments also likely vastly inflated some of the jobs data. Case in point is the surprisingly strong jobs numbers in education. Public school jobs historically are usually down in July. Since many workers at public schools were laid off in March and April due to the pandemic, public school hires, on a seasonal adjusted basis, were up by a dramatic 215,000 in July, and seasonal adjustments (that work during normal times) were affected by earlier virus-related layoffs, leaving seasonally adjusted school hires greatly inflated in July.

There were other significant crosscurrents in the data releases. The July unemployment rate in the BLS jobs report was 10.2%--below S&P Global Economics' estimate of 10.7% and a 10.9% average unemployment rate for the third quarter. However, this may be a near-term bottom for the indicator as additional state quarantines may force more businesses to close, and with that more layoffs, suggesting that more people will join the unemployment lines in the near future. And given the significant distortions in the data, we watch the U6 rate of underemployment as an alternative measure of conditions in the jobs market. Indeed, at 16.5%, it may be closer to job market conditions in a COVID-19 world. Fortunately, the U6 rate fell to 16.5% from 18% in July, but that still leaves 26.4 million people, the highest number in 10 years, not able to fully contribute to the workforce (see chart 2).

Chart 2

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The path of the virus adds significant uncertainty to where the jobs market is headed this year. COVID-19 has already spread through the Sunbelt, with a number of states instating or reinstating closures. Already states such as California, Texas, and Florida--which are ranked in the top five states by GDP measure and together account for close to 28% of the economy--have instated and reinstated restrictions on indoor and group activities.

The White House Task Force created to manage the pandemic has now recommended that 21 states (was 18 states three weeks ago) in the coronavirus "red zone," which includes the above-mentioned states, should roll back reopening measures amid surging cases. If these 21 states complied with recommendations, about 51% of the U.S. economy would be affected by restrictions on indoor and group activities--leading to another round of business closures just after they had begun to reopen their doors.

The longer the virus lasts, the higher the chances of business failures. Also, there's a risk that the temporarily unemployed will become permanent. That depends on how many of the businesses that survived the first round of closures will be able to make it through another round, and of those that survive, will they be able to rehire? It also will affect the number of new job openings, which is already down to levels not seen since early 2015.

Of those businesses that survived, many likely were forced to downsize. U.S. companies' layoff announcements jumped by 54% to 262,649 in July, according to a Challenger, Gray & Christmas Inc. report. Moreover, many businesses that were temporarily closed because of the virus may now have shut their doors permanently. According to the most recent Yelp second-quarter Economic Average report, as of mid-July, 55% of the 132,500 temporary closures on Yelp are now permanently closed, leaving those people who started off temporarily unemployed losing their jobs permanently.

Chart 3

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Indeed, workers who were unemployed for "temporary" reasons are at a greater risk now of losing their positions permanently (for which workers have no expectation of returning to their previous employers), which means longer spells of unemployment. In the July jobs report, the number of temporarily unemployed is down by 48.9% since April on a seasonally adjusted basis, chipping away at the huge climb in temporary layoffs since February. However, people who are permanently unemployed are going in the opposite direction. The number of people who permanently lost jobs held near June numbers, but it's up by 125% over February.

Consumer Spending Hinges On Recovery Of At-Risk Service Sectors And Fiscal Stimulus

As Congress continues to negotiate to reach an agreement on new stimulus, the income boost from the unemployment benefits in the CARES Act package (passed in late March)--which expired on July 31--more than compensated for the income hit from loss of employment. Unemployed folks were receiving an additional $600 from the federal government, on top of state-varying regular unemployment benefits. The Congressional Budget Office estimates five out of six laid-off workers are earning more under enhanced benefits than when working.

If the enhanced benefit is not extended, it will amount to roughly $74 billion per month less in aggregate income transfer from the government to workers out of jobs (assuming the number of folks who are claiming unemployment insurance remains at last week's level of 31 million). This will weigh on consumer spending recovery, which is still 7 percentage points below January levels.

Remarkably enough, consumer spending has seen an uneven recovery. Spending in the goods sector (both durable and nondurable)--autos, household durables, computers and software, recreational vehicles, food for home, toys, and others--has recovered handsomely while services remain well under January levels. It is not surprising that the service sector is taking longer to bounce back given the nature of the shock. Spending on health care services has come back slowly, even after the resumption of elective and nonemergency procedures. Other people-facing services are constrained in capacity and limited by consumers' heightened risk averseness. The only categories of services spending that have held up well are essentials, such as housing and household utilities, and sectors that are benefiting from the shift to remote work, including video streaming and rental, audio streaming and radio, postal delivery services, and internet access.

Chart 4

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Chart 5

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While the government remains committed to providing income support to affected individuals--another fiscal package (in August) is still the most likely case, though Congress appears to be struggling with coming to a compromise--relief for state and local government, combined with virus-health issues and how they affect consumption of services, holds the key to the pace of economic and labor market recovery.

Table 1

Review Of Economic Indicators Released In The Past Two Weeks (July 27, 2020-Aug. 7, 2020)
Latest period Jul-20 Jun-20 May-20 Level year ago % year-over-year
Labor market
Jobless claims (four-week moving average) 1-Aug-20 1,337,750 1,499,000 2,288,250 213,750
Unemployment rate (%) July 10.2 11.1 13.3 3.7
Total nonfarm payrolls (change in '000) July 1763 4791 2725 194
Private nonfarm payrolls (change in '000) July 1462 4737 3236 160
Average hourly earnings, all employees (% change) July 0.2 (1.3) (1.1) 4.8
Hours worked July 34.5 34.6 34.7 34.3
ADP Employment (change in '000s) July 167 4314 3341 (10,806)
Participation rate (%) July 61.4 61.5 60.8 63
Consumer spending and confidence
Consumer Confidence Index (Conference Board) July 92.6 98.3 85.9 135.8
Personal income (m/m, % change) June (1.1) (4.4) 7.4
Personal disposable income (m/m, % change) June (1.4) (5.1) 8.9
Consumer spending (m/m, % change) June 5.6 8.5 (4.8)
Savings rate (%) June 19 24.2 7.1
Consumer Sentiment Index (UMICH) July 72.5 78.1 72.3 98.4
Business activity and sentiment
Durable goods order (m/m, % change) June 7.6 15.0 (12.5)
ISM Manufacturing Index (level) July 54.2 52.6 43.1 51.3
ISM-Non Manufacturing Index (level) July 58.1 57.1 45.4 54.8
Housing and construction
Pending home sales (%, m/m) June 16.6 44.3 6.3
Construction spending (%, m/m) June (0.7) (1.7) 0.1
External sector
Trade balance of goods and services (bil. $) June (50.7) (54.8) (51.7)
Exports goods and services (bil. $) June 158.3 144.7 209.3
Imports goods and services (bil. $) June 208.9 199.5 261.0
Prices
PCE Price Index (m/m % change) June 0.4 0.1 0.8
Core PCE Price Index (m/m % change) June 0.2 0.2 0.9
Q2 20 Q1 20 Q4 19
GDP (%, SAAR) (32.9) (5) 2.4 (9.5)
Employment Cost Index (q/q, % change) 0.5 0.8 0.7 2.7
Note: Jobless claims are weekly data. Sources: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, U.S. Census Bureau, Institute for Supply Management, and ADP Research Institute.

Table 2

Economic Release Calendar
Date Release For Forecast Consensus Previous
11-Aug PPI Jul 0.2 0.3 (0.2)
PPI (excluding food and energy) Jul 0.2 0.1 (0.3)
12-Aug CPI Jul 0.3 0.3 0.6
CPI (excluding food and energy) Jul 0.2 0.2 0.2
Treasury Budget (bil. $) Jul (250) (220) (864.1)
13-Aug Export Price Index Jul 0.4 0.4 1.4
Import Price Index Jul 0.6 0.5 1.4
Initial claims, week of 8/8/20 (000s) 1,000 1,185 1,186
14-Aug Retail sales Jul 2.1 1.8 7.5
Retail sales (excluding auto) Jul 1.5 1.3 7.3
Nonfarm Productivity (preliminary) Q2 (12.0) 0.2 (0.9)
Unit labor costs (preliminary) Q2 (3.0) 5.6 5.1
Industrial Production Jul 3.1 3.0 5.4
Capacity Utilization Jul 70.5 70.4 68.6
Business Inventories Jun (0.3) (1.2) (2.3)
University of Michigan Consumer Sentiment (preliminary) Aug 73.0 72.8 72.5
17-Aug Empire State Index Aug 16.0 14.1 17.2
18-Aug Housing starts (mil.) Jul 1.220 1.230 1.186
20-Aug Philadelphia Fed Index Aug 23.6 20.0 24.1
Leading indicators Jul 1.2 1.0 2.0
21-Aug Existing home sales (mil.) Jul 5.400 5.300 4.720

The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

U.S. Chief Economist:Beth Ann Bovino, New York (1) 212-438-1652;
bethann.bovino@spglobal.com
U.S. Senior Economist:Satyam Panday, New York + 1 (212) 438 6009;
satyam.panday@spglobal.com
Research Contributor:Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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