A strong jobs report but big holes remain and we’re not outta the viral woods.

July 2nd, 2020 at 10:38 am

Payrolls popped up by 4.8 million in June, as commerce continued to gradually reopen across the country. Most industries (75 percent) added jobs, and millions of furloughed workers were called back, taking the unemployment down to 11.1 percent from 13.3 percent in May.

The strong report begs the question: are we out of the virus-infected woods? Has the pandemic-induced recession ended as we enter a strong bounce-back to a solid expansion?

The answer is as best uncertain and, based on recent state-level spikes in the virus, likely “no.” That is, absent a second wave of the virus, the economy has probably bottomed out, and yes, more labor market reports like June’s would restore a job market that would start to reliably repair the deeply damaged fortunes of working families.

But the hole in the economy and in family earnings is still large, unemployment remains at recessionary levels, racial gaps are beginning to predictably grow, continuing unemployment claims, also out this morning, are still high and stagnant (i.e., stuck at very high levels). Most importantly, the failure of national leadership to control the virus means forthcoming reports may not be this strong.

The trend is your friend, the level bedevils

The figure below shows just how far payroll jobs fell off a cliff as the virus took hold, and how, even with two strong months of job gains—4.8 million in June and 2.7 million in May—a huge hole of almost 15 million jobs remains.

Source: BLS

Similarly, the table below shows highly elevated unemployment rates relative to February, with the rates for Blacks and Hispanics up about three percentage points more than for whites. Note that in the last recession, unemployment peaked at 10 percent, below today’s 11.1 percent.

Source: BLS

As noted, most sectors added jobs in June. Restaurant and bar re-openings alone added 1.5 million jobs, accounting for almost a third of the total gains. Factory employment was up 356,000 in June, following on May’s gain of 250,000. Still, manufacturing has recovered less than half of the 1.4 million jobs lost since February.

State government—down 25,000—was an important exception to the overall trend, and states have consistently lost jobs over the crisis. This is a germane observation for Congress as they contemplate the next round of fiscal relief, in which aid to states should be an essential component.

Furloughed workers returning to work

One important and unusual characteristic of the pandemic recession has been the highly elevated share of the unemployed on temporary furlough. A key question of the strength of the nascent expansion is whether these jobless persons would move back into the employment column as they are rehired at reopening businesses or move over the more permanent jobless column.

The BLS pointed out that “June’s unemployment decline occurred primarily among people on temporary layoff. There were 10.6 million people on temporary layoff in June, down by 4.8 million.” This is a positive sign, one that bears watching in coming months as temporary layoffs as a share of the unemployed, at 60 percent, is still highly elevated. To the extent workers exit temporary layoffs to return to work, the expansion should experience a faster liftoff.

What’s the wage story?

There’s one part of the jobs story that’s been particularly hard to discern over the crisis: what’s happening with wages? What makes the wage story so tricky is the “composition effect” impacting wage results. That is, because low-wage workers were initially hardest hit by the downturn, wages rose as they left the sample, leaving a higher share of higher-paid workers still drawing paychecks. This bias reverses as they return to the job market, as was the case in June, when hourly pay fell 1.2 percent, a huge monthly decline.

One way to partially control for this bias and get a feel for what’s happening with paychecks is to look at the aggregate wage bill: basically, weekly earnings summed over all workers. This measure includes the hourly wage, but it also factors in job losses. In real terms, since February aggregate weekly pay for private-sector workers is down an historically large 7 percent and down 8 percent for middle and low-wage workers. (Note: this calculation includes my forecast for June inflation.)

In other words, the earnings of working families, while improving as per the gradual reopening, are still way down. Fiscal relief—Unemployment Insurance and checks to households—has surely made up some of the difference for them, but until their paychecks come back, they’re far from out of the woods.

In sum…

An important fact about today’s jobs report is that it is a lagging indicator. Its data were collected in the first half of June, mostly before some states began to see new spikes in cases that led to reversals of their economies’ reopenings. Subsequent reports may show less favorable trends, prolonging the closing of the persistent huge job gaps we’ve faced since April.

In this regard, there is no plausible or credible excuse for the extent to which national leadership has failed the nation’s people and our economy on controlling the virus. Simply mandating, or even modelling, wearing face masks is predicted to have a powerful impact on the spread of the virus and thereby the economy. As a recent, careful study found, “A face mask mandate could potentially substitute for lockdowns that would otherwise subtract nearly 5% from GDP.”

Finally, the jobs, earnings, and unemployment gaps, along with the continuing shedding of state workers, require another robust fiscal package focused on extended UI and state fiscal relief. Yes, we now have enough data to establish a positive trend associated with reopenings, but absent effective virus control, no one can be confident that this trend will persist.

Hey, Senators! The case for extending Unemployment Insurance benefits is air tight.

June 26th, 2020 at 10:49 am

There’s new information out this morning that should be a critical input into ongoing negotiations in the U.S. Senate. Senators are debating whether the economy needs another relief package, and, if so, what should be in it, and this morning’s income report from the Bureau of Economic Analysis is virtually yelling what the answer should be.

The report shows that aggregate income—all the wages and profits and interest payments, etc. that go to U.S. households—fell by a large, but expected, 4 percent in May. More importantly, spending was up a robust 8 percent; in an economy that’s 70 percent consumer spending, that’s an important boost.

But how do you get falling income and higher spending? Is it higher earnings coming out of May’s jobs report? Is it people spending out of their savings? There’s a bit of both, as pay rose 2.5 percent in May and while the savings rate is still hugely elevated at 23 percent, that’s down from April.

But the big story, one that is highly germane to the Senate’s negotiations, is that consumer spending is being driven by relief payments in general, and Unemployment Insurance in particular. The figure below, by economist Jay Shambaugh, tells the story. It shows how incomes have actually gone up (the y-axis is trillions of nominal dollars), compared to pre-crisis levels, not due to higher pay, of course, but due to all the transfers, among which Unemployment Insurance is playing a particularly important role.

This focus on UI payments, especially the $600 weekly plus-up that expires at the end of next month, links direct to the Senate negotiations (the plus-up is called “Pandemic Unemployment Compensation” or PUC). Senators are said to be considering different options, but there are those who want to pull back significantly from the $600, or even let it expire, on the basis that it is disincentivizing work as states reopen for business. Such concerns might be arguable if there were enough jobs to go around. But when the unemployment rate is this high, and labor supply far surpasses labor demand, such disincentive effects simply don’t bite. In fact, a careful, new study of the most recent hiring patterns “found no evidence to support the view that the temporary $600 supplement, which meant many workers received benefits higher than their wages, drove job losses or slowed rehiring substantially.”

In another new study out this morning, economist Josh Bivens shows just how important PUC (and UI payments in general) are to sustaining whatever growth we’ve got in the current economy. To give you a sense of the magnitudes we’re talking about here, Bivens first shows the unprecedented role UI benefits are playing as share of wage income.

Source: Bivens

This morning’s income report showed that PUC payments alone, at an annualized rate, came to about $840 billion in May, over 4 percent of total, personal income. Biven than goes on to simulate the impact of extending PUC through the middle of next year, finding that it would increase GDP by 3.7 percent and jobs by over 5 million. Of course, those results would be sacrificed if PUC were allowed to expire. As Bivens puts it: “This estimate shows us how enormously important expanded unemployment insurance over the next year will be to aggregate demand, as new job openings are all but guaranteed to be fewer than jobless potential workers over that time, so any incentive effect in keeping workers from searching actively for work will not be the binding constraint on the economy’s growth.”

In fact, economist Jason Furman make precisely this point in a similar analysis from the flip side of Bivens, estimating the impact of eliminating PUC on GDP and jobs. His results, shown below, estimate that the PUC repeal would lower GDP by almost 3 percent by the end of this year, and cost millions of jobs through 2022.

Source: Furman

These are not unusual or the least bit unexpected results. With the economy still so demand constrained, due to not just the extent of coronavirus but its recent increase in “hot spots” across the country, consumers lack the confidence and employees lack the paychecks to get back to anything approaching normal levels of commerce. It doesn’t matter a whit how much government officials exhort people to get out and spend. As long as there’s no vaccine and we’re so deeply lacking in leadership around controlling the spread of the virus, jobs, spending, and demand in general will be suppressed.

Senators, take heed! In this climate, it would be political and economic malpractice not to expand UI benefits. The data and analysis could not be clearer: people’s economic circumstances and outlook are still suffering from the pandemic-induced recession and they thus still need considerable assistance as we haltingly make our way through the crisis.

Figures behind our “targeting the Black rate” essay

June 14th, 2020 at 9:18 am

Janelle Jones and I have a new piece coming out wherein we explain why and how the Federal Reserve should target the Black unemployment rate in setting monetary policy.

The first figure to which we refer is the share of quarters since 1972 (when the Black jobless rate data start) that the unemployment rate for different racial groups has been below CBOs estimate of the “natural rate.” Whites enjoyed full employment labor markets almost 60% of that time. The Black rate, conversely, has never fallen below the estimated full employment rate (which I’ve, for the record, long argued is biased up, meaning these figures are optimistic).

Source: BLS, CBO

The next figure relates to our discussion of who benefits most from tight labor markets. It shows that pre-crisis, the pace of nominal Black median weekly earnings surpassed that of Whites.

Source: BLS

Surprise! One report does not a new trend make but reopening may be occurring sooner than expected.

June 5th, 2020 at 11:23 am

Before even getting to the facts of the case on today’s very surprising jobs report, let me share a few insights.

–One jobs report does not a new trend make.

–Keynes was right.

–Economists are terrible at catching turning points.

–Don’t ignore levels for trends.

In one of the more surprising jobs reports I’ve seen, payrolls rose–as in, went up!–last month by 2.5 million and the unemployment rate fell from just below 15 percent to 13.3 percent (though, as I’ll show, racial disparities may be resurfacing). These monthly reports are always noisy, so we don’t want to completely rethink our priors, but expectations were for unemployment to shoot up to about 20 percent and jobs to tank by another 5-10 million.

So, what happened?!

Well, first of all, let’s start with some context. The payroll figure below shows that job losses in March and April summed to an unprecedented 22 million. Thus, even if this uptake pace continues, it would take a year to just make up lost ground.

Second, we should also recognize that 13.3 percent is recessionary-level unemployment, far above the 10 percent jobless rate peak of the last recession. Again, it will be a long time–I’d guess well more than a year–until we’re back to full employment. Also, if we include a group of workers who are absent from work and may well be unemployed, the jobless rate jumps to about 16 percent (note: with that same adjustment, April’s rate was 19.7 percent, meaning the rate fell even faster last month if you include these absentees).

Third, in my last month’s jobs report, I noted that the magnitude of the shock dampened the usual disparities between changes in white and non-white labor market indicators. Also, the fact that Black and Brown workers are disproportionately “essentials” is also a factor limiting the usual disparities we see in downturns, where non-white’s indicators deteriorate faster than whites. As the table below shows, today’s report may reveal those disparities resurfacing.

Fourth, we knew this was coming. It just may be appearing sooner than we, or at least I, expected. All forecasts show a bounceback in the second half of this year of GDP, jobs, etc, though the strength of the bounce is still contested. Again, if this sticks, it means that bounce started before we thought it would.

Fifth, as noted above, Keynes was right! There should be no question in anyone’s mind that the fiscal and monetary actions taken to ameliorate the downturn and hasten the recovery have been effective.

Turning back to today’s numbers, the table below suggests some gaps are developing in the Black and Hispanic unemployment and employment rate changes. Since February, for example, the Hispanic jobless rate is up 13.2 percentage points compared to 9.3 points for whites. To be clear, those are both huge spikes in unemployment over just a few months, but historical patterns predict that such diversion will continue.

Source: BLS

The next figure is designed to provide some context for understand where we are and the depth of labor market weakness that still prevails. It first shows how payrolls fell off a cliff as we shut the economy down in the pursuit of control the spread of the virus. The uptick, while very welcome, clearly doesn’t significantly change the picture. It would take almost of year of gains of May’s magnitude to get back to where we were.

Source: my analysis of BLS data.

But as the forecast line shows, just getting back to where we were–i.e., gaining back 22 million lost jobs–would be under-performing relative to the pre-pandemic trend. To get back to that trend would require an extra 3.5 million jobs.

Other revealing numbers from the report:

–The problem facing state and local governments is still as real as ever. Since February, their combined job losses are 1.6 million, 8 percent of their total jobs. These sectors desperately need fiscal relief, like by yesterday, or they’ll have no choice but to continue aggressive layoffs of essential workers.

–As Martha Gimbel pointed out on Twitter, the payroll jobs diffusion index, which tracks the percent of industries adding jobs, went from 4 percent in April and 70 percent in May, the biggest monthly jump on record. If that holds, it means a much larger set of both industries and firms is reopening sooner than expected.

–After growing almost 5 percent in April over March, nominal wages fell a percent last month. These weirdly large monthly changes are being driven by “composition effects:” many low wage workers left the labor market in April, kicking up the change, and returned in May, pushing it back down.

–Speaking of that, one number I’m tracking is the share of unemployed workers on layoff, meaning those who could be quickly called back to work as firms reopen or ramp back up. That share was a hugely elevated 78 percent in April, but was expected to perhaps fall sharply in May, as temporary layoffs became permanent. That didn’t happen, and the share remains elevated at 73 percent, implying a large share of the unemployed are still at least somewhat attached to work.

So, does this mean those of us who expected a much worse jobs report should sharply update our priors? Surely not based on one jobs report. That said, my sense is that there is real information in today’s report telling us that our aggressive fiscal and monetary responses to the sharp downturn have probably helped to pull the recovery forward. Even so, the return to full employment is many months, if not years away, unemployment is still extremely high, and millions of Americans are still experiencing deep and lasting economic shortfalls.

In other words, our countercyclical repair work is helping, but it’s far from complete.

The US job market catches the virus and crashes.

May 8th, 2020 at 10:24 am

Due to the shutting down of the American economy to control the spread of the coronavirus, the bottom fell out of the job market last month. I’ve been writing up monthly jobs reports for decades, and I’ve never seen anything remotely close to this. Employment gains that were made over almost a decade vaporized in two months.

Payrolls collapsed by 20.5 million in April, by far the worst month on record for a data series that begins in 1939. Combining March’s losses of 870,000, revised from -701K, payrolls are down by 21.4 million over the two months. This takes the level in April—131.1 million total, nonfarm jobs—down to the lowest level since February of 2011, meaning in two months, the job market shed almost a decade worth of employment gains (see figure).

In the last recession, the worst month for payroll job losses was 800,000, and the totality of jobs lost was around 9 million. In other words, we just recorded two months of jobs losses that were more than twice that of the whole of the recession formerly known as “great.”

The unemployment rate also hit an historical peak of 14.7 percent, but even that elevated value was biased down by 6 million labor force exits. If all the exiters were actively unemployed, the rate would have been 18 percent. Underemployment, a broader measure of labor market slack that includes millions of part-time workers who want full-time work, rose to a record high 22.8 percent last month, as the number of involuntary part-timers almost doubled to almost 11 million.

The reliable pattern in downturns is for African American and Hispanic conditions to deteriorate faster than that of whites. But over the past two months, the changes by race were roughly comparable (though worse for Hispanics) as shown in the table below showing how much unemployment rates have risen and employment rates have fallen since the crisis began by for workers. There are at least two explanations for this unusual, relatively equal pattern. It may be that because Black and brown workers are disproportionately in essential services, their jobless rate was slightly insulated. For example, one of the only sectors that added jobs last months was jobs in “warehouse clubs and supercenters,” which disproportionately employ non-whites, at least in non-managerial positions.

But more likely is the fact that force of the massive demand contraction is, for now, overwhelming the historical racial patterns. My strong prediction is that this will change in coming months and the usual racial disparities will resurface.

BLS does not break out underemployment by race. In a forthcoming paper with Janelle Jones, we estimate this rate, based on historical relationships. Based on that estimate, we predict black underemployment was 33 percent last month, the Hispanic rate was 32 percent and the white rate with 19 percent.

Jones and I argue that these quickly deteriorating conditions must be considered in light of the devastating, disproportionate impact of the virus on the black community, a function of the structural racism that is putting African African’s at uniquely high risk of illness and death. Brookings fellow Rashawn Ray summarizes this tragedy: “There is a saying — ‘When America catches a cold, Black people get the flu.’ Well, in 2020, when America catches coronavirus, Black people die.” Correlates of this outcome — what epidemiologists call comorbidities—include neighborhood density and safety, diminished health-care access, exposure to pollutants and more.

Even what looks like a piece of good news in today’s report is deceptive. Wages rose 4.7 percent over the month and 7.9 percent since last April, a notably higher growth rate than their previous trend of around 3 percent. But the spike occurred not because those who stayed on the job got big wage increases but because lower wage workers dropped out of the job market. Imagine a job market with three workers who earn $6, $10, and $20 per hour. The average wage is 36/3 or $12 per hour. If the $6/hour worker loses her job, the average rises to $15 per hour (30/2), a 25 percent increase. This is analogous to what happened in April.

One question today’s report begs is: what’s next? Is this the bottom of the labor market trough?

It almost surely is not. Forthcoming reports are unlikely to be this negative, but, even as some commerce is slowing coming back online, payroll numbers will likely carry a negative handle for months to come as layoffs exceed hires. Most forecasts, for what they’re worth in this unique and thus hard-to-model moment, have unemployment peaking in the third quarter of this year.

That said, one relatively hopeful number in the report is that out of 23 million unemployed, 18 million are on temporary layoff, meaning they still retain some connection to work. However, that connection will fray the longer the downturn last, yet another reason to implement for more rigorous testing and tracing than has heretofore occurred.

But for now, we’ve yet to see the bottom of this cycle. If anything positive comes out of the undeniable disaster that is this jobs report, it will be that it forces Congress to revisit the urgency they appeared to understand earlier in the crisis and quickly get back to administering the necessary economic relief. Just as critical, we need the Trump administration to finally set forth a coherent virus-control plan to get to the other side of the crisis, but I recognize that the likelihood of that occurring is diminishingly small.