- The large 140,000 drop in the Bureau of Labor Statistics (BLS) December nonfarm payrolls, driven disproportionately by the pandemic-sensitive leisure and hospitality sector, was far worse than our expectation of a modest 50,000 job gains for the month.
- The unemployment rate (from a separate household survey) held steady at 6.7%, nearly twice its precrisis level of 3.5%--although when factoring BLS misclassification issues, the overall December rate would have been closer to 7.3%.
- We expect this jobs market slowdown to be temporary--once the vaccination rollout is farther along and economic restrictions re-loosen, job growth will reaccelerate. Still, with 9.8 million jobs fewer jobs than prior to the pandemic, it won't be before 2023 that the 22 million jobs lost (in March and April) are regained (still a shortfall once adjusted for population growth).
- The Fed's new monetary policy strategy that focuses on maximum inclusive employment means the fed funds rate will likely be at its current 0%-0.25% until at least mid-2024.
Hit To Payroll Jobs Is Worse Than Expected
With people staying home for the holidays amid the surge in COVID-19, many workers were left out in the cold this holiday season. Nonfarm payroll jobs declined for the first time in this recovery, following seven consecutive months of improvement. While the headline was ugly, upward revisions to the prior two months cancel out most of the December jobs lost, leaving a net 5,000 jobs lost. That is still worse than expected, just not as bad.
The pace of job gains was already slowing since the initial pop during summer, with the average monthly job growth over the last three months at 283,000. This pace of job gains would be considered excellent under normal circumstances, but not now. Payrolls over the May-December period have reclaimed only 56% of the jobs lost in March and April. At the current pace, it would take more than three years just to get back to the February 2020 jobs level. This would still be far short from full employment accounting for population growth.
There Was A Disproportionate Impact Sectorwise
The magnitude of the decline in December payrolls is not nearly as large as it was in March 2020 (-1.4 million) and April 2020 (-20.8 million) when lockdown restrictions were much more stringent and affected almost all sectors. The current COVID-19 restrictions are more targeted on people-sensitive sectors, so it is not surprising that most sectors were spared from payroll job declines. The hit to jobs was concentrated in the leisure and hospitality sector (-498,000), with bars and restaurants falling 372,000. Employment in this most vulnerable-to-pandemic sector remains 23% lower than February levels.
State and local government payrolls declined as well--by 51,000, placing them 1.4 million below the February 2020 level, reflecting the significant pressure this sector has been under from damages to states' finances from the pandemic. Employment in the component of local government that excludes education declined by 32,000, and state government education lost 20,000 jobs.
Most other major sectors--that are sensitive to the business cycle--added jobs, with professional and business services (+161,000), retail (+121,000), and construction (+51,000) leading the way.
The pandemic has disproportionately affected jobs concentrated in industries where people generally aren't able to work from home. This has naturally manifested into the leisure and hospitality sector taking the largest hit. December was no different. This pandemic-vulnerable sector is disproportionately made up of the lowest wage workers, which also meant that, in December, average hourly earnings for all employees on private nonfarm payrolls increased by 23 cents to $29.81 as these lower paid workers went off payrolls (which raised the average hourly earnings estimates).
This dynamic was also evident in the aggregate weekly payrolls--a proxy for wages and salaries that combines employment, average weekly hours worked, and average hourly earnings--which still had an increase (of 0.4% month over month, placing it just 1.4% below its February 2020 level) even as the leisure and hospitality sector saw its aggregate weekly payrolls decline by 5.5%. Fortunately, the extension of pandemic unemployment benefits will help cushion the blow for those who continue to struggle to find a job.
Improvement In Unemployment Rate Stalls
The weakening labor market recovery was evident in the data published from a separate household survey as well. The unemployment rate held steady at 6.7% in December, just as labor force participation did at 61.5%. If we adjust the unemployment rate to reflect BLS's misclassifications and the fall in labor force participation since February, the unemployment rate would be closer to 10%. The employment-to-population ratio did not improve for a third consecutive month.
On a more encouraging note, the shares of permanent unemployed declined for the first time in eight months, to 38.9% from 44.0%. On the flip side, the rise in layoffs basically represented the rise in the number of temporary layoffs, suggesting many of last month's unemployed workers expect to be recalled.
Still, the share of long-term unemployed continued to rise, which is not a good sign because long-term unemployment tends to have scarring effects, thus increasing chances of weakening labor market attachment in the medium- to long-term recovery, directly affecting participation rates (lower than implied by population ageing). The unemployment rate may then seem better than what it really is.
Implications For Growth Forecast And Policy Assumptions
It is clear the pandemic controls pace of the recovery in the near term and there is a long way to full recovery. At S&P Global, we don't expect the unemployment rate to reach its precrisis low until sometime in 2024.
We have said since June that it's not a far-fetched possibility the U.S. economy could see a COVID-19 resurgence that cripples U.S. growth. The weaker-than-expected jobs report supports our expectation that GDP will post a decline of an annualized 2.3% in the fourth quarter, and with the viral spread unabated, we worry that first-quarter growth may be weaker than our already miniscule forecast of just 0.8%.
Congress passed a $900 billion COVID-19 relief bill in late December, which extends the special emergency unemployment benefits for 11 weeks through mid-March. In addition, the $600 one-time relief checks and various other moratorium measures in the bill will go a long way to supporting growth in the first quarter as restrictions keep many businesses shuttered. The disappointing jobs report may also give the next administration and Democrat-led congress more reasons to pass additional stimulus once President-elect Joe Biden is at the White House, to help stem the tide. Indeed, an additional demand stimulus in the coming months is an upside risk to our growth forecasts published in December ("Staying Home For The Holidays," Dec. 2, 2020).
The Fed is also fully aware of the evolving risks in the labor market and the Federal Open Market Committee (FOMC) showed in its minutes to the December policy meeting (that was published this week) that it will remain in the current accommodative stance for the foreseeable future. Consistent with our macroeconomic forecasts, we do not expect the Fed to raise rates from the current zero-bound in this cycle before sometime midway through 2024. This is in line with the Fed's latest summary of economic projections and the recently codified "inclusive maximum employment" strategy to achieving monetary policy mandate of full employment.
|Review of economic indicators released in the past two weeks (Dec. 25, 2020 - Jan. 8, 2021)|
|Latest period||Jan-21||Dec-20||Nov-20||Oct-20||Level year ago||% year-over-year|
|Jobless claims (four-week moving average)||2-Jan-21||818,750||837,500||740,500||788,500||219,750|
|Unemployment rate (%)||December||6.7||6.7||6.9||3.6|
|Nonfarm payrolls (change in '000s)||December||(140)||336||654||184|
|Private nonfarm payrolls (change in '000s)||December||(95)||417||924||164|
|Average hourly earnings, all employees (%, month over month change)||December||0.8||0.3||0.1||5.1|
|ADP employment (change in '000s)||December||(123)||304||409||167|
|Participation rate (%)||December||61.5||61.5||61.6||63.3|
|Total vehicle sales (units, in mil.)||December||16.7||16.1||16.8||17.3|
|Business activity and sentiment|
|ISM Manufacturing Index (level)||December||60.7||57.5||59.3||47.8|
|ISM Nonmanufacturing Index (level)||December||57.2||55.9||56.6||54.9|
|Housing and construction|
|Construction spending (%, month over month change)||November||0.9||1.6||3.8|
|Exports of goods and services (bil. $)||November||184.2||182.0||210.6|
|Imports of goods and services (bil. $)||November||252.3||245.1||251.6|
|Trade balance (bil. $)||November||(68.1)||(63.1)||(41.1)|
|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. Notes: Jobless claims is weekly data.|
|Economic Release Calendar|
|CPI (excluding food and energy) (%)||Dec||0.2||0.2||0.2|
|Treasury Budget (bil. $)||Dec||(200)||(234)||(145.3)|
|14-Jan||Export Price Index (%)||Dec||0.6||0.5||0.6|
|Import Price Index (%)||Dec||0.6||0.6||0.1|
|Initial claims (000s)||Wk of 1/9/21||825||800||787|
|15-Jan||Retail sales (%)||Dec||0.4||0.2||(1.1)|
|Retail sales (excluding auto) (%)||Dec||0.0||(0.1)||(0.9)|
|PPI (excluding food and energy) (%)||Dec||0.3||0.2||0.1|
|Empire State Index||Jan||4.9||5.6||4.9|
|Industrial production (%)||Dec||0.4||0.5||0.4|
|Capacity utilization (%)||Dec||73.5||73.7||73.3|
|Business inventories (%)||Nov||0.6||0.5||0.7|
|University of Michigan Consumer Sentiment (prelim)||Jan||82.0||81.0||80.7|
|21-Jan||Housing starts (mil.)||Dec||1.480||1.560||1.547|
|Philadelphia Fed Index||Jan||10.0||12.6||11.1|
|Existing home sales (mil.)||Dec||6.520||6.500||6.690|
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:||Arun Sudi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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