Head of Macroeconomic Research
Summary: The number of analysis pointing out that the U.S. labor market continues recovering has been quite astounding in light of the August non-farm payrolls report. We don't share this optimistic view about the U.S. economy. We have done some data-crunching and have reached a totally different conclusion. Many labor market statistics highlight that the underlying trends in many economic sectors are still deteriorating. That means the recovery will be probably much slower than anticipated and that the worst is likely not behind us yet, at least in terms of unemployment.
The BLS’s unemployment report draw a lot of attention past week, especially the headline figure that showed the official unemployment rate (called U-3) slowed at 8.3% vs est 9.8%. This massive monthly drop has been interpreted by many commentators as the undeniable sign that the U.S. labor market is recovering much faster than forecasted. The reality is quite different. If we dig into data, we see early evidence of scarring effects of unemployment that seriously questions the quality of the underlying economy. Unemployment duration is jumping fast, with the share of those unemployed for over 15 weeks increasing to 60% in August. And the number of people that permanently lost their job rose from 3400k from 1200k at the beginning of the year. With flu season about to start and the risk of new spread of the COVID-19, further social distancing measures will certainly be implemented in the coming weeks or months, leading to a higher number of permanent job losers.
The below chart, that has first circulated on Bloomberg, does a good job of showing what is really at stake on the labor market. Temporary unemployment has fast decreased once the lockdown has been lifted but permanent unemployment, that will probably increase on the back of corporate bankruptcies in the short- and medium-term, is likely to drag the economy down for a very prolonged period of time.
The immediate risk for the U.S. economy is that a chunk of the population, often the youngest and the least qualified (those working in retail, hospitality etc.), falls into mass unemployment, hence further accentuating the pre-existing and hot inequality issue.
It is likely that the crisis will result in sustainable incentives to automatize and this new wave of automation, whose speed is still uncertain, could attack this time the whole skill distribution and also hurt high-skilled workers.
One obvious consequence of the pandemic is that it will serve as accelerator of change for companies. In the 1990s, the arrival of computers in business life caused labor market polarization. Workers either skilled up or had no other choice but to take low skilled jobs in the service economy. Those jobs are now at risk in COVID-19 times but no one knows for sure what might happen to white-collar workers. It is likely that the crisis will result in sustainable incentives to automatize and this new wave of automation, whose speed is still uncertain, could attack this time the whole skill distribution and also hurt high-skilled workers. Automation could thus keep unemployment much higher than in previous crisis, potentially for decades if governments do not manage to address this issue.
In fact, in these unusual circumstances, governments, in the U.S. but also elsewhere, are facing an almost insoluble problem. The first solution, which has been favored by most DM governments, is to extend as long as necessary furlough scheme (especially via the PUA in the U.S.) in order to avoid a massive share of workers to fall into poverty. But it has a cost for the economy. As rightly said by BoE’s chief economist Andy Haldane, “keeping all those jobs on life support is in some ways prolonging the inevitable in a way that probably does not help either the individual or the business”. We are slowly falling into the zombie economy trap that will cause low productivity and low potential growth for the years to come. The second solution is to shift the policy focus from job protection at all cost to job creation in new emerging sectors (such as the green and the circular economies). But even with the best vocational training policy possible, history and experience prove that it is rare the destruction of existing low-skilled jobs and newly automated jobs due to a shift in the structure of the economy will result in the creation of at least as many high-quality and protected jobs. Said differently, an undefined share of the population will be permanently or semi-permanently out of the labor market, mostly due to inadequate competence, and will need to be put on life support by the state forever. This confirms the need to seriously rethink about policies that were once considered as utopian, such as UBI.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
