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.

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