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Employment Surprises to the Upside

RFP
Payroll employment rose by 4.8 million jobs in June after being revised up slightly for the month of May. Employment since the peak of the previous cycle in February has fallen by 14.7 million. That is still nearly double the drop in jobs we experienced during the Great Recession; this is no time to pop champagne corks. The establishment survey does not include the self-employed, who have been hit hard. All of the job gains appear to have come from the temporary layoffs made due to COVID-19 in March. Temporary unemployment, which comes from the household survey, fell by 4.8 million. The survey was conducted during the week of June 12; the period May 17 to June 13 included the ramp-up for Memorial Day.

The hole is still deep while prospects for continued gains in July have faded with a resurgence in COVID-19 cases and hospitalizations. High frequency data on new job postings suggest a drop in late June, which could show up as a drop in employment in July.

Gains in the private sector dominated the bounceback in jobs. Local governments added jobs temporarily as they moved to reopen, but state governments continued to shed jobs. The blow to state and local government employment tops 1.5 million, more than double the gains since the last recession. Employment in state and local government is hovering at the lowest levels since June 2001, also a recession. The bloodletting is expected to continue in July. Many state and local governments started their fiscal years on July 1 and were unable to borrow enough to offset the holes in their budgets due to COVID-19. Federal transfers to the states could help but are not expected to be large enough or come soon enough to blunt the initial blow to employment starting in July.

Gains were concentrated in low-wage leisure and hospitality jobs (mostly restaurants and bars), retail, education and health care. Hiring for the Memorial Day holiday supported a 2.1 million jump in jobs in the leisure and hospitality sector, which sadly also contributed to the June surge in COVID-19 cases. Retail jobs increased by 740,000 but were still in the hole even as states reopened. Many retailers have already closed their doors again as COVID-19 cases surged in recent weeks, which will take a toll on the July jobs data. Apple was the first major retailer to announce closings.

Health care picked up with elective surgeries (some of which have since been suspended again) and the reopening of doctor and dentist offices. These are vulnerable to layoffs in July as infections surge. People tend to cancel trips to high-risk public places when fear of contagion is high. Older parts of the population are particularly skittish about going out in this environment.

Next up were manufacturing and construction jobs, although both added fewer than expected. Specialty contractors continued to do particularly well as homeowners continued to make repairs and remodel their homes while firms scrambled to erect plexiglass barriers and reconfigure office space to allow for more social distancing. Perhaps one of the few positives of this crisis will be an end to the open office concept; its success outside of the large tech hubs was questionable at best.

Average hourly earnings fell 35 cents an hour to $29.37. The drop reflects the surge in low-wage workers being called back in the service sector and marks a 5% gain from a year ago. Hourly earnings continue to overstate annual wage growth. One of the unique characteristics of this recession has been its impact on nominal wages. Many who could work from home were asked to accept a cut in wages to preserve cash flow and limit white-collar layoffs. Many of those cuts are expected to persist over the summer given the sequential blow to cash flow associated with rolling regional outbreaks. The average workweek fell 0.2 of an hour to 34.5 hours. That reflects the part-time nature of many of the jobs recalled. The manufacturing workweek, which includes far fewer workers, actually increased slightly.

The household survey printed a drop in the unemployment rate to 11.1% in June from 13.3% in May. The Bureau of Labor Statistics continues to struggle with misclassification of workers who are categorized as absent from work due to COVID-19 instead of unemployed. This misclassification added 1% back onto overall unemployment for the month, which is less than the 3% miss we saw in May.

The labor force participation rate jumped 0.7% to 61.5% in June, but remains well below the 63.4% of February. Much of that increase was driven by Hispanic teens and Hispanic women over 20 years old. The Black unemployment rate fell to 15.4%. The Hispanic unemployment rate dropped to 14.5%. That compares to a 10.1% unemployment rate for whites. The last hired into the expansion were the first to be laid off and tend to be the last to be called back once the economy recovers. It took more than a decade to see a meaningful drop in the unemployment rate for Black people relative to that for whites in the wake of the Great Recession. Expect more social unrest this summer.

The employment to population ratio, which hit a high of 61.1% in February, moved up slightly to 54.6% in June. That is still close to the lowest level on record, which was hit in April and underscores that sad state of affairs. The largest hurdle for many people attempting to return to work is that their children are out of school without summer school programs available. This is hitting minority women particularly hard. Grandparents who once cared for children cannot do so safely, given the risks of COVID-19.

Those forced to work part-time for economic reasons declined to 9.1 million, which is close to the highest levels we saw during the Great Recession. That, coupled with a rise in the number of discouraged workers, or those who have given up looking for work, pushed down the U-6 or “stress measure” of unemployment to 18%. It would have been 19% if workers who said they were absent from work due to COVID-19 were properly classified as unemployed. That is still stunningly high.

Separately, initial unemployment insurance (UI) claims for the week ending June 27 were released. Initial claims came in at 1.44 million, a slight decline from the previous week. That drop was offset by an increase in pandemic unemployment assistance (PUA) claims, which rose almost 840,000, which we should add to the UI and continuing claims. The problem is that data is a mess. Each state does its tally differently. Many UI claims actually represent PUA claims that have yet to be processed and approved. Three states have not even started to process the PUA expansions to unemployment benefits approved in the CARES Act in late March. Imagine no savings, no income and no ability to pay for food or rent for five months.

Continuing claims fell to 19.2 million in the week ending June 20. Continuing claims for PUA rose to 12.8 million in the week ending June 13, the most recent data available. Again, double counting is a problem. About the only thing we can say about the UI data is that some of the largest layoffs in the last week occurred in states that are suffering the worst of the surge in COVID-19 cases and hospitalizations. These include California, Florida, Arizona and Tennessee. Layoffs were heavy in the service sector, which is most vulnerable to the losses tied to COVID-19.

No, it is not a conspiracy. Sadly, it reflects our inability to really corral the states to do what we need them to do in a crisis. The result has left many with depleted checking accounts and no money for food and shelter during the worst economic crisis since the Great Depression.

Bottom Line
The June employment report is more backward than forward looking, as layoffs have already picked up again. This summer will be a struggle for recovery in employment, which should underscore the need for extensions to unemployment insurance and additional aid. Calling on you, Congress. This is not the time for a victory lap. We need to prepare for what we know is in the pipeline, which is not pretty.

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