U.S.: The labor market is healing, but at a very slow path

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Since the outbreak, at Saxo, we monitor very closely initial jobless claims and continuing claims as they are two of the best timely indicators we have on the U.S. economy. The recovery in the labor market continues, but jobless claims remain quite elevated according to the latest report, mostly reflecting economic disruptions from a new spread of the virus and job cuts by companies most hit the pandemic (notably in the airline or entertainment industries). We fear that the wave of layoffs is just starting and that worse may come in coming weeks with negative implications for the labor market.


It was certainly one of the most important U.S. data today. Initial jobless claims and continuing claims are out. Jobless claims are lower at 837k vs 850k estimated and 837k in prior week while continuing claims are also down at 11.8m vs 12.2m estimated and 12.7m in prior week. In further details, we observe the largest gains in New York (+7.9k), Georgia (+7.3k) and Massachusetts (+5.2k). At the other end of the spectrum, the largest decreases are noticed in Maryland (-2.2k), Michigan (-2.2k) and also Indiana (-1.5k). This report confirms that the recovery in the labor market continues, but at a slower path than in previous months, and we also start to see an economic divergence at play between states, with the recovery occurring at different magnitude across states. It thus corroborates our central scenario according to which the United States is facing a K-shaped recovery.

The overall decline in jobless claims is undoubtedly a positive signal, but we are still very worried regarding the slow path of the recovery and the persistence of many downside risks. Many companies, especially large companies, has been in a wait-and-see position for the past months but now there is no doubt a vaccine will not be found in the short term (some experts are talking about a 12- to 18-month period) and that economic disruption will persist beyond 2020, they have no other choice but to cut costs. Just yesterday, large U.S. companies announced about 105,000 job cuts. And this is only the beginning. The airline and the entertainment industries are obviously in the forefront of job cuts with American Airlines cutting 19,000 jobs, United Airlines 13,000 jobs and Disney 28,000 jobs. But other sectors, less hit by the pandemic, are also following a similar path, such as the banking and financial sector with Goldman Sachs resuming its plan to eliminate less than 1% of its workforce — about 400 positions.

Tomorrow, we should have a more detailed understanding of the real state of the U.S. labor market with the release of the September Nonfarm Payroll report. It should be once again a very mixed report. The official unemployment rate U-3 is expected to decrease at 8.2% from 8.4%. The range of estimates for nonfarm payrolls is quite large once again, comprised between 850k and 1371k with the median at 900k. Assuming that the economy created 900k new jobs in September, there is no reason for celebration as it would simply mean that the labor market has only recovered about half of the jobs that were lost in March and April (about 22m). There is still a very long road ahead before the labor market gets back to pre-covid levels.

In addition, if we dig into data as we always strongly advise you when it is about the nonfarm payroll report, it is likely that we will have confirmation that the pandemic will leave deep scars on the labor market. In the August report, we noticed three concerning trends that seriously questioned the quality of the underlying economy. The report revealed a very strong polarization of the labor market between high-skilled workers and low-skilled workers (which are most likely to face unemployment), a worrying jump in unemployment duration (the share of those unemployed for over 15 weeks increased to 60%) and a rising share of people that permanently lost their job (reaching 3400k versus 1200k at the beginning of the year). These are our three focal points of interest that we will be closely watching tomorrow afternoon when the September report will be released. We think it is a much more pertinent way to assess the quality of the recovery than focusing only on job creation and the official unemployment rate.

I will publish my comment on the September Nonfarm Payroll report tomorrow afternoon on my Twitter handle @Dembik_Chris.

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