Payroll Gains to Moderate in June

Payroll employment is expected to rise by another two million in June with sharp upward revisions to the month of May. We expect to see April revised down further. Private sector payrolls are forecast to rise by 2.3 million. Jobs in state and local governments will be mixed as some offices like the Department of Motor Vehicles (DMV) reopen, but layoffs in education continue. The next round of layoffs at the state and local levels is expected to hit on July 1 when budget cuts tied to COVID expenses kick in. Road and bridge repairs, which we desperately need, will be among the first to get cut. Next up will be our first responders. It looks like this will be a very long summer.

The Bureau of Labor Statistics (BLS) has struggled to capture the data during this pandemic. Statisticians have had a hard time locating firms (some of which have gone under) and making estimates on a timely basis using the shifts in birth and death rates for small businesses from the establishment survey. The BLS has begun surveying households and small businesses on a weekly basis to do as much as possible to make the data timely, but it’s clearly struggling. The birth rate for new firms fell precipitously in March and April, then picked up a bit in May.

The surveys were never set up to capture the sheer speed and magnitude of swings in employment triggered by a pandemic. High frequency data on job site postings and the data on continuing unemployment claims, which come from weekly unemployment claims, show a sharp bounceback in hiring in mid-May was followed by a slowdown in hiring in late May and early June. We will see whether the BLS can fully capture those shifts.

To some extent, even the June employment report is backward looking, given the collateral damage that a resurgence in infections will likely have on hot spots where businesses reopened early. The Open Table application has already seen a sharp drop in reservations for restaurants in Houston, a new hot spot. It will not be long before businesses in the worst affected areas are forced to shutter, at least temporarily.

The health care sector should see gains as elective surgeries (I know; I had one) resumed in late May and early June. Those gains could prove fleeting, given the recent spike in COVID infections and hospitalizations. The governor of Texas just moved to suspend elective surgeries in the worst affected areas. That will also deter people from returning to dentists and other doctors in hot spots, but losses are not as widespread as they were during the height of the outbreak in April.

Another really important issue is whether schools can reopen in the fall. Households with children under 18 were hit harder by layoffs. Many people cannot return to work without summer programs and schools reopening in the fall. Most universities will be staying online or sending students home by Thanksgiving. That will take a toll on economic activity during the height of the holiday season for 2020 and hold down the labor force participation rate, especially for women who still tend to pick up more of the slack for childcare than men.

Construction and manufacturing jobs are expected to continue to post strong gains. Both sectors can more effectively reopen without the threat of contagion. Plexiglass barriers have been installed, work shifts staggered and masks required. Employers have also taken temperature checks and surveyed returning workers about their potential for being a carrier. The whole exercise of taking temperatures and asking questions is a bit like “duck and tuck” during the Cold War. (Most people are contagious before they actually come down with a fever.)

Average hourly earnings are expected to fall 0.5% in June as more low-wage workers dominate the gains in jobs. That translates to a 5.7% gain in wages on a year-over-year basis, but is misleading given the blow to nominal wages from COVID-19. Many white-collar workers who could continue to work from home were forced to take temporary pay cuts in the wake of COVID; more of those cuts will linger since the surge in infections and likely pullback by businesses and consumers. Some pay cuts will be followed by layoffs if we can’t get enough of the U.S. up and running fast enough in the wake of the current outbreak.

Separately, the household survey is expected to show an unemployment rate of 12.8%. That assumes a slight uptick in the participation rate from the ultra-low levels during lockdowns. There is a chance the unemployment rate could be significantly higher. For three months running, the BLS has struggled with misclassifications executed by the Census workers who take the survey; they do not work directly for the BLS. They misclassified a large number of workers as absent instead of unemployed when they actually were unemployed due to COVID. That added nearly 3% to the unemployment rate in May. If the misclassification gets fixed, the unemployment rate could be much higher for June compared to May.

Bottom Line
Even if employment improves in June, we will see a very deep hole and enter the summer months with headwinds. The drag from layoffs at the state and local levels could be particularly large. The U.S. Post Office is also struggling to stay funded. Still nothing to cheer about given the extraordinary pain we have already endured.

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