Summary: Enjoy the good news while it lasts.
- June payrolls rose 4.8mn significantly beating consensus expectations for 3.2mn
- Unemployment rate fell to 11.1% from 13.3%, also falling to below consensus estimates of 12.5%
- Initial weekly jobless claims remain stubbornly high, rising to 1.42mn from 1.48mn and remaining above expectations
- Continuing claims rose to 19.3mn from 19.2mn
Larry Kudlow touts the report as “Spectacular!”, President Trump thinks this is evidence the economy is “roaring back”, the market likes it but behind the cheerleading what does the data tell?
Firstly, the nature of this crisis and the sudden stop to activity with the economic shock being so deep and widespread means that the initial snapback as the economy reopens, by default of the sheer depth, will seem forceful. But this is not a particularly good indicator of the future trajectory of the economy, post that initial economic boost. This is clearly visible in the payrolls report via the job gains being most concentrated in hospitality, leisure and retail as these areas of the economy have been boosted by an initial pent up demand as restrictions have eased, having reopened after a period of lockdown. The jobs recovered are not broad based across multiple industries and even in the sectors that have seen the biggest increases, employment is far from pre-crisis peaks. And with the virus resurgent gains in these sectors are unlikely to last.
The data beat relative expectations is good news, but we cannot lose sight of true perspective and underlying trends beyond the headline numbers. Employment is still 9.6% below its February level with 17.8mn remaining unemployed, making the jobs “recovered” relatively meagre in comparison to jobs that have been shed.
Furthermore, the data is truly looking in the rear-view mirror, only capturing the employment picture in the week ended June 13, and with the spread of the virus accelerating again, the same pace of continued improvement will be hard to come by. Job gains will slow with the virus resurgence and the July numbers will likely disappoint.
More broadly, this is not just true of the employment data. As the Citi US Economic Surprise Index chart below demonstrates, data has not been as bad as initially feared evidenced by the improvement in economic surprises. As expectations are raised and the surprise index sits at elevated levels market participants may be primed for disappointment.
The US is now reporting over 51,000 new coronavirus cases a day, the 3rd record high in a row, and confirmed cases are rising in 40 of 50 US states. Consumer behaviour is changing as the virus spread accelerates and with job gains centred in those areas of the economy which will be hit once again as cases rise the recovery will be derailed. This trend will also be enhanced as the expanded Unemployment Insurance programme expires at month end also hitting demand unless the programme is extended.
Even though in states where the virus spread is accelerating, state governments have not reimposed full lockdowns, reopening’s have been paused, some restrictions centred around bars and pools have been enacted and mobility and restaurant data shows that peoples own behaviour is different as many look to protect their own health.
More pertinent, is beyond the initial resumption in economic activity and jobs that are reinstated we likely have a prolonged period where unemployment will remain high, now with the virus still rampant in Q3 and layoffs stubbornly high doesn’t make for a speedy return to pre-COVID levels.
In contrast to the employment report jobless claims data paints a contradictory picture. New jobless claims have remained persistently high, along with increasing continuing claims and those reporting permanent job losses have also jumped higher. This will create a longer lasting drag on activity and plateau the recovery even as the economy reopens. Florida and Texas, two populous states where the virus case count has been accelerating rapidly, also reporting increases in continuing claims, highlighting the drag that comes with the easing of restrictions too early as the virus takes off again.
These underlying trends outlined above are similar to that illustrated by PMIs. There is an initial bounce back in activity as economies reopen, but this expansion comes from a very depressed level. A small proportion of jobs have recovered from a staggering number that have been lost. This is consistent with lockdowns being lifted but my no means indicates a return to prior levels of activity. PMIs shooting up towards 60 would be more in keeping with the narrative of a V-shaped recovery. But this is not the case, most remain around 50 or even below 50 signalling a stabilisation in the collapse in activity or a continued contraction in activity, but at a slower pace. The V-shaped recovery is a myth!
As these trends were digested, along with news of the continued virus spread as California and Arizona both reported their largest increase in daily cases yet, gold reversed early losses and climbed back later in session as traders dug below the headline jobs beat.