- The Bureau of Labor Statistics reports the U.S. economy regained 1.37 million payroll jobs in August; nearly half of the jobs lost in March and April have now been recouped.
- However, the pace of job gains continues to slow, and there are already signs that the recovery could be lengthy.
- Meanwhile, the unemployment rate fell to 8.4% in August, a quicker-than-expected retracement from the 14.7% peak in April, but remains twice as high as the pre-pandemic rate from February.
- The lower-than-expected unemployment rate will have few monetary policy implications for now, given the Fed's recent announcement that it will adopt a new monetary framework that formalizes its intention to pursue a more dovish policy path than in the last expansion.
August BLS Jobs Report: Good News, But Not Without Signs Of Tougher Times Ahead
The Bureau of Labor Statistics (BLS) provided some good news for workers ahead of Labor Day weekend. The U.S. economy regained 1.37 million payroll jobs in August, according to the BLS jobs report, as more businesses gradually returned to normal operations.
The standard U-3 unemployment rate, which is based on a separate survey of households, fell back into single-digit territory at 8.4% in August (9.1% factoring in possible BLS misclassifications), from 10.2% in July, with people joining the workforce (968,000) and even more people getting jobs (3.76 million). More people entering the workforce--perhaps due to optimism that they'll land a job --and even more people getting paychecks are good signs. But while this improvement is better than expected, the unemployment rate is still twice the pre-crisis rates seen in February (see chart 1). The U-6 unemployment rate, which includes persons who are marginally attached to the labor force, declined sharply to 14.2% from 16.5%.
Temporary U.S. Census hires, which will end in September, account for 238,000 (17.4%) of payroll job gains. Moreover, the pace of job gains has slowed dramatically since the May surge, with 11.5 million jobs still yet to be regained. Private-sector employment was up 1 million in August, slowing from a 1.5 million gain in July and a 4.7 million gain in June.
|Net Payroll Jobs|
|Level (000s)||Share of total loss (%)|
|Loss (March and April)||(22,160)|
|Pace of steady payroll jobs gain|
|Expected time (months) taken to get back to pre-pandemic|
|1.4 million/month (August 2020 pace)||8.25|
|Note: Calculations do not account for growth in population. Estimates are for simple illustration purposes and don't account for other moving parts.|
We expect to see the jobs market slow further this year, with net job gains to remain well under 1 million for the foreseeable future. That will likely leave the total number of jobs lost still in the millions as the New Year arrives. Moreover, further jobs weakness from state and local governments, whose budgets were assaulted by COVID-19, adds pressure to job gains this year. We do not anticipate total employment numbers will return to pre-pandemic levels before 2022. (Even then, the numbers would be short of full employment levels, given growth in the working-age population.)
Nearly half of the jobs lost in March and April were recouped by August, in line with expectations. That was the easy half, we think. The next half is going to take some time as we now go through the "sticky" part of the unemployment pool. The August report already shows signs that long-term issues are developing just as all major sectors are losing momentum (see chart 2).
First, the number of long-term unemployed is growing, though not as fast as in earlier months since the coronavirus-induced recession. The number of people counted as unemployed for 15 weeks or longer crossed the 8 million mark in August (from 2 million at the same time last year) and now represents 60% of the unemployed (from 34% at the same time last year). For reference, the aftermath of the 2008-2009 Great Recession saw the number of long-term unemployed peak at a little more than 9 million.
Second, the number of permanent jobs lost has continued to increase, jumping to 3.4 million in August from 2.9 million in July (see chart 3). Although this remains well below the near 7 million in the depths of the Great Recession, the steady rise in this metric could indicate growing permanent scars from this crisis. The number of persons on temporary layoff declined to 6.2 million in August from 9.2 million in July and now accounts for 45.5% of the total unemployed, compared with the high of 78.3% in April.
The workers who were unemployed for "temporary" reasons are at greater risk now of losing their positions permanently. The longer the duration of the pandemic, the higher the chances of business failures. And on top of that, if state and local governments--which are some of the largest employers--do not get budget relief from the federal government, there will likely be more pressure to cut positions (not just furlough). This means longer (stickier) spells of unemployment.
A disproportionate share of low-wage workers continue to feel adverse effects of the crisis, and the compositional effect helped wage growth come in at 0.4% month over month--the strongest in the past four months. On a year-over-year basis, this translated to historically high 4.7% wage growth. Still, aggregate weekly payrolls, which are a core income proxy, were still down 2.5% year over year in August. In the absence of an extension of income support from the fiscal authorities, even in a reduced form, we will likely see reduced growth momentum in consumer spending in the coming months.
The unemployment rate has retraced 6.3 percentage points from its peak of 14.7% in April. This might have implications for fiscal policy support in the near term, since it strengthens the impetus to resist extending income support to households and businesses. However, although the unemployment rate has already dipped below what the Federal Reserve forecast in its June Summary of Economic Projections, we do not think this lower-than-anticipated rate has monetary policy implications for now, given the still-high levels of labor market slack and, more important, the recent announcement of a tweak in monetary framework.
From The Fed's Corner: Announcement Of New Monetary Framework
Upon completion of an 18-month review, the Federal Reserve announced last week that it is adopting a new framework for how it conducts monetary policy to achieve its congressionally mandated goals of full employment and price stability. Fed Chair Jerome Powell unveiled high-level particulars of the new approach, which essentially brings the Fed's longer-run goals and strategy into alignment with key longer-run structural changes in the economy.
This shift in policy framework was long overdue, given the fact that the Fed's operating framework had been challenged in the past 15 years with i) a falling natural rate of inflation (with limited policy space given rates near the zero bound) (see chart 4); and ii) a weakened relationship between the unemployment rate and inflation (with questionable estimates of the slack-output gap and unemployment gap arising from an unmeasurable potential GDP growth rate and natural rate of unemployment--and related persistent undershooting of the inflation target) (see charts 5 and 6).
The new framework essentially confirms recent Fed behavior and allows for more discretion and less preemption. We see four main takeaways.
First, the unconventional is now conventional--meaning the Fed will continue to heavily rely on tools such as forward guidance and asset purchases, especially with real neutral rates (closer to zero) constraining accommodation via the interest rate policy channel. The persistence of downside risks means the Fed will bring these tools to bear more quickly to keep interest rates across the yield curve low. The Fed controls the short end of the interest rate curve with its interest rate policy, so if the markets do not follow in tandem at the longer end, the Fed will not hesitate to apply additional tools, such as the yield curve control, to put a hard stop to any rising of the long end of the curve. That said, the degree of tolerance for the long end of yield curve drifting higher remains unclear.
Second, the Fed's decision will now be "informed by assessments of the shortfalls of employment from its maximum level." This replaces "deviations from maximum employment" language. Experts on Fed language have commented that the term "deviations" is two-sided, while "shortfalls" is one-sided. Basically, low unemployment itself no longer justifies tighter policy in the absence of clear inflationary pressures. This also reflects the Fed's heightened awareness of the cost of unemployment, particularly as the costs relate to disadvantaged persons.
Third, the Fed introduced flexible average inflation targeting, also known as FAIT. Since 2012, the Fed has had an inflation target of 2%, and yet the average inflation since then has been only 1.4%. The persistent undershooting might have helped in lowering market-based inflation expectations as well. Until now, the Fed did not attempt to compensate for undershooting the inflation target, at least officially, even though Chairman Powell time and again reiterated that the Fed would let inflation overshoot that target. By not codifying this in a statement, the Fed appeared to be treating the 2% inflation target as a ceiling in that it tightened policy to preemptively prevent inflation from rising above 2%.
Now the policy allows for overshooting, and bygones will not be bygones--the Fed's average inflation target will become more of a backward-looking exercise. If there was undershooting in the past, there will be time for catching up with overshooting in the future in order to bring average inflation to 2%. That said, the Fed's "flexible" approach (the time span hasn't been specified) leaves it considerable policy discretion.
Fourth, as Fed Governor Lael Brainard put it, the statement "codifies the key lesson from the Global Financial Crisis--that financial stability is necessary for the achievement of our statutory goals of maximum employment and price stability." Heightened concern about financial market imbalances potentially caused by lower-for-longer accommodative monetary policy means the Fed will be more active on macroprudential regulations as the first line of buffer. This also opens up the possibility of rate hikes to quell financial excess.
The motivation to change was clearly there. But one has to wonder, considering inflation has consistently fallen short of the 2% target since it was announced, why anyone should believe that inflation can be boosted above 2% anytime soon. The explicit commitment that the Fed has put in place to review its strategic framework every five years gives it a chance to reassess the new operational framework.
For markets, it means a lower-for-longer stance. Even without the shift, it would probably have been a long time before any hint of policy tightening. Our previous view that there will be no rate hikes until at least before late 2023 is now at risk of being pushed further out.
|Review Of Economic Indicators Released In The Past Two Weeks (Aug. 17, 2020-Sept. 4, 2020)|
|Latest period||Aug-20||Jul-20||Jun-20||Level year ago||% year over year|
|Jobless claims (four-week moving average)||29-Aug-20||1,166,000||1,385,688||1,727,438||215,450|
|Unemployment rate (%)||August||8.4||10.2||11.1||3.7|
|Nonfarm payrolls ( change in 000s)||August||1,371||1,734||4,781||207|
|Private nonfarm payrolls (change in 000s)||August||1,027||1,734||4,781||157|
|Average hourly earnings, all employees (% change)||August||0.4||0.1||(1.3)||4.7|
|ADP employment (change in 000s)||August||428||212||4,485||166|
|Participation rate (%)||August||61.7||61.4||61.5||63.2|
|Consumer spending and confidence|
|Consumer Confidence Index (Conference Board)||August||84.8||91.7||98.3||134.2|
|Personal Income (m/m, % change)||July||0.4||(1.0)||8.2|
|Personal disposable Income (m/m, % change)||July||(0.1)||(1.8)||8.4|
|Consumer spending (m/m, % change)||July||1.9||6.2||(2.8)|
|Savings rate (%)||July||17.8||19.2||7.0|
|Consumer Sentiment Index (UMICH)||August||74.1||72.5||78.1||89.8|
|Business activity and sentiment|
|Chicago Fed National Activity Index (level)||July||1.18||5.3||(0.2)|
|ISM Manufacturing Index (level)||August||56||54.2||52.6||48.8|
|ISM-Non Manufacturing Index (level)||August||56.9||58.1||57.1||56|
|Housing and construction|
|Construction spending (%, m/m)||July||0.1||(0.5)||(0.1)|
|Housing starts (million units)||July||1.496||1.22||1.212|
|Building permits (million units)||July||1.483||1.258||1.366|
|Existing home sales (million units)||July||5.86||4.7|
|Trade balance of goods and services (bil. $)||July||(63.6)||(53.5)||(51.1)|
|Exports goods and services (bil. $)||July||168.1||155.5||210.5|
|Imports goods and services (bil. $)||July||231.7||208.9||261.5|
|PCE Price Index (m/m % change)||July||0.3||0.5||1.0|
|Core PCE Price Index (m/m % change)||July||0.3||0.3||1.3|
|Q2 20||Q1 20|
|GDP (%, SAAR)||(31.7)||(5.0)|
|Corporate profit (%, SAAR)||(11.7)||(13.1)|
|Nonfarm productivity (%, SAAR)||10.1||(0.3)|
|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.|
|Economic Release Calendar|
|8-Sep||Consumer credit (bil. $)||Jul||12.0||13.0||8.9|
|10-Sep||PPI (excluding food and energy)||Aug||0.3||0.2||0.5|
|11-Sep||CPI (excluding food and energy)||Aug||0.3||0.3||0.6|
|11-Sep||Treasury budget (bil. $)||Aug||(358.0)||(385.0)||(63.0)|
|15-Sep||Empire State Index||Sep||8.0||4.6||3.7|
|15-Sep||Export Price Index||Aug||0.4||0.4||0.8|
|15-Sep||Import Price Index||Aug||0.5||0.5||0.7|
|16-Sep||Retail sales (excluding auto)||Aug||1.2||1.0||1.9|
|17-Sep||Housing starts (mil.)||Aug||1.3||1.5||1.5|
|17-Sep||Philadelphia Fed Index||Sep||15.0||18.2||17.2|
|18-Sep||Current account (bil. $)||Q2||(167.0)||(167.5)||(104.2)|
|18-Sep||U. Mich. Consumer Sentiment (prelim)||Sep||78.0||75.0||74.1|
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;|
|U.S. Senior Economist:||Satyam Panday, New York + 1 (212) 438 6009;|
|Research Contributor:||Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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