The tip of the wave: Jobs report shows large losses, but predates the worst of it

April 3rd, 2020 at 9:34 am

Payrolls fell by 701,000 in March, their first monthly decline in almost 10 years, and the jobless rate ticked up to 4.4 percent (from 3.5) as the coronavirus and efforts to contain it pounded the U.S. labor market last month. Because of the timing in the surveys in this report, it only picks up the front end of tsunami of layoffs that occurred in the second half of March, when initial claims for Unemployment Insurance rose by almost 10 million, an increase most economists would have considered inconceivable before this crisis. But the report clearly identifies the tip of the wave.

The surveys were fielded in the middle of March, and thus better reflect conditions in the first half of the month, when containment measures were just taking hold. Commerce, travel, and broad consumer activity was slowing but hadn’t shut down as they would in March’s second half. Even so, the report is far more negative than recent vintages, and shows how remarkably quickly conditions have reversed in the job market.

For example, the 0.9 point increase in the jobless rate was the largest one-month increase since 1975; the 1.7 point increase in the underemployment rate, to 8.7 percent, is the largest increase on record since this measure was introduced in 1994. The Bureau reports that the “bulk of the increase in unemployment occurred among people on temporary layoff, which increased 1.0 million in March to 1.8 million.” Measures of labor market participation also fell sharply, a clear reflection of the reversal in labor demand. This shift is especially disheartening as prior to the virus, the tight job market was pulling typically left-behind workers into the job market. Such gains are quickly unraveling, a point I return to below.

As readers know, we typically feature our jobs smoother which averages monthly payroll changes over 3, 6, and 12 month windows in order to pull out the underlying signal. We print the smoother below, but it too is less informative this month, since a backwards looking average by definition downplays the sharp shift in trend that occurred in the past two weeks (to emphasize this point, we include a bar for the 701K loss in March alone).

A better, simpler approach this month is to plot monthly payroll levels, which show the sharp trend reversal in March.

Source: BLS

Hourly pay stayed on track last month, up 3.1 percent and beating inflation that’s been running just north of 2 percent, though price growth will likely slow (boosting real wage growth) due to very low energy prices. However, wage trends can be deceptive at times like this because of “composition effects.” For example, as more low-wage workers face layoffs relative to high-wage workers, this can show up as accelerating wage growth. I’ll try to parse out this potential bias in forthcoming reports.

Different sectors have different degrees of exposure to the jobs impact of the virus, of course. One way to think of this difference is that if you can draw a paycheck by clicking into Zoom meetings, you’re in a less exposed sector. So, restaurant, hotel workers, flight attendants and anyone in a face-to-face services (and their suppliers) has a much higher chance of a layoff relative to many in professional services like legal, accounting, or research. The food vendor who works at a professional sports venue is directly exposed; the team’s lawyer is not.

For example, employment in restaurants and bars fell by over 400,000 in March, a one-month loss of over 3 percent, by far the sector’s worse month on record. Conversely, employment in professional and technical services was up slightly in March, by about 6,000. True, that’s a weak month for the sector, and most sectors (outside of those that are directly responsive to containment efforts) are being hit by the sharp downturn. But magnitudes of losses will differ by exposure.

It is far from incidental, of course, that there’s an inequality divide implicit in that distinction. A useful analysis from the St. Louis Federal Reserve split workers by occupations into high and lower risk of unemployment. About half of the workforce fell into each category (to be clear, that doesn’t mean unemployment will hit 50 percent; not every exposed worker will get laid off). The analysis found that “the highest risk of unemployment also tend to be lower-paid occupations. The average annual earnings of the low-risk occupations is $64,600, about 75% higher than earnings in the high-risk occupations, at $36,600. This indicates the economic burden from this health crisis will most directly affect those workers who are likely in the most vulnerable financial situation.”

Source: Charles Gascon, St. Louis Fed.

We’ve never shut the U.S. economy down as we have done in response to the virus. This was a wholly necessary response to its threat, but it came at point when the labor market was persistently closing in on full employment, providing meaningful employment and wage gains for workers who are often left behind under more slack conditions. Much as full employment provides out-sized benefits for the most vulnerable workers, the reversal we’re now witnessing metes out the most pain on those same groups of workers. Many of these laid off workers lack paid leave and their savings rate is zero or negative. That is, they are the least insulated among us against this sort of sudden shock.

That is why our relief efforts must scale to the unprecedented size of the problem. Recent stimulus measures, with their emphasis on checks to household and expanded Unemployment Insurance, are a good start but we a) must ensure these measures are quickly implemented, and b) we will need further trips back to this well.

The risk at times like these–risks we’ve seen borne out in both the health and economic responses–is doing too little. As Dr. Fauci said the other day (paraphrasing): If you think I’m overreacting, I’m probably getting it right.

A wounded Trump is an especially dangerous Trump: Thoughts on his proposed economic pivot.

March 24th, 2020 at 11:44 am

When I first heard that Trump and some other conservatives were making the case for punting on containment of the virus in the interest of reflating the economy, I ignored it because it made no sense to me. It still doesn’t, but from what I’m seeing, the idea seems potentially serious enough to warrant a response.

There are at least three reasons this pivot idea is nonsensical.

First, Trump may admire and aspire to emulate authoritarian leaders, but he has no such powers. He did not close my workplace and he cannot reopen it. To be sure, I’m not discounting his bully pulpit and he surely has the capacity to undermine containment efforts with deadly consequences by telling people to get back to work and go out to restaurants, etc. But especially if many more people get sick—the predictable result of his pivot—and if other authorities, including governors, the CDC, school systems, etc. tell people to continue to distance, his admonitions won’t matter as much as he thinks they will. To put it succinctly, I ain’t going back to normal until Dr. Fauci says so, and I’m sure I’m not alone.

Second, he can’t stop a deep recession because it’s already here. The key indicators, like GDP and unemployment, are lagging but they will soon reveal that the U.S., if not the global economy, has already begun to contract. More timely indicators confirm this dire forecast. For example, claims for Unemployment Insurance are expected to reveal 3 million layoffs in the past week. At the worst of the last recession, we lost 2.3 million jobs in the worst quarter (2009q1). True, the length of the downturn is not yet known, but as the next point explains…

Third, any pivot would likely backfire and exacerbate the length and depth of the recession. A significant reduction of containment efforts that resulted in spiking cases of Covid-19 would lead us right back to where we are now, with people distancing to protect themselves, but this time, with an overwhelmed health care system and far more deaths than would otherwise occur. Not incidentally, from Trump’s skewed perspective, if I’m correct about this scenario, the markets would tank even further. The essential principle, and the sad truth, is that putting the economy in deep freeze is necessary to have an economy capable of rebounding once containment is achieved.

So, summarizing: Trump couldn’t enforce a return to normality even if he wanted to, it’s too late to stave off a recession, and any attempt to do so would likely lead to a longer and deeper downturn.

Of course, such logic, which appears to be shared by the majority talking about this, may not prevail. Trump’s populism has long been driven by his remarkable ability to identify and exploit this space where elites (e.g., the health professionals he’s now inveighing against) tell the masses to do something that’s costly to them. Trump then goes after these elites on behalf of the people, arguing that the elites think they’re better than the rest of us and we shouldn’t have to suffer because of their agenda. This has proven to be a powerful force in his ascendancy, and I hear it as a clear subtext in his tweets and statements advocating for the pivot. His alleged loss of patience with Dr. Fauci is an example of this dynamic.

But even more pointedly, Trump recognizes his reelection bid is at serious risk. He may be free of the virus, but it has wounded him politically, and a wounded Trump is an especially dangerous Trump. He’s clearly especially rankled by his inability to move the stock market around, something he’s done far more than any president. Right out of the gate, he made the rookie mistake of making the stock market his report card, and the massive selloff, wiping out all the gains over his presidency, has be driving him nuts.

Despite the faulty logic of the pivot, which is far more likely to backfire than enhance Trump’s fortunes, is it conceivable that he and his coterie would trade hundreds of thousands, if not millions, of lives to get re-elected?

Of course it is.

Yes, this is an emergency. No, that doesn’t justify a $500 billion Trump/Mnuchin slush fund.

March 22nd, 2020 at 6:39 pm

By Jared Bernstein and Dean Baker

While the indicators are lagging, the U.S. economy is in a recession that will very likely be extremely deep. It’s likely that real GDP falls at double-digit pace in the quarter that begins next month and the unemployment rate more than doubles. If that sounds implausible, history shows that in sharp downturns, the unemployment rate takes the elevator up and the stairs down.

To their credit, after a slow start Congress appears to have grasped this urgency and is working around the clock on what may turn out to be the largest stimulus package in our history, with a price tag of $1-2 trillion, or 5-10 percent of GDP (the Recovery Act was $800 billion over two years, roughly 2 percent of GDP). Given that fighting the virus essentially calls for putting the U.S. economy in deep freeze for an unknown period, we vigorously support going big.

But even as Congress must speed toward completion and passage of this legislation, there is time to avoid wasting resources, and there is one, large part of the bill—$500 billion, according to the Washington Post—that threatens to create a “slush fund” for businesses with virtually no oversight, no benefits for workers, and far too much discretion for President Trump to dole out goodies to himself and his cronies.

The lending mechanism in question allocates $500 billion to backstop (i.e., repayment is guaranteed by the government) private-sector loans to the tune of $50 billion to airlines, $8 billion for cargo carriers, $17 billion for businesses “critical to national security,” and $425 billion for businesses, states, and cities.

To be clear, there’s nothing wrong and a lot right with providing resources of these magnitudes for businesses. The bill also proposes $350 billion for small business with a smart, built-in incentive to help workers: if employers use a portion of the loan to maintain their payrolls, that portion is forgiven.

But the $500 billion carries no such incentives (there is a requirement that CEO can’t raise their pay over last year’s level, but that could mean just “restricting” a CEO to a $15 million paycheck, an extremely mild condition). Nor does there appear to be adequate oversight or “underwriting,” the process by which banks determine credit worthiness, leading Sen. Warren to tweet that it “sounds like Trump hotel properties like Mar-a-Largo could receive huge bags of cash – and then fire their workers – if Steve Mnuchin decides to do a solid for his boss with taxpayer dollars.”

We know for a fact that Democrats want to complete this stimulus package as quickly as possible to get money out the door to people and small businesses that are a few paychecks away from personal despair and possible failure or bankruptcy. But the bill won’t pass without the support of Democrats in both chambers (the stimulus will require 60 votes in the Senate).

Yes, time is of the essence, but Democrats must use their leverage to remove this Trump/Mnuchin slush fund while they quickly negotiate the attaching of pro-worker conditionality to it. The main thing for this moment is to get the help to families (direct cash) and small businesses out the door.

There is no obvious reason that we can’t do something similar for larger firms by making loans available for purposes of meeting their payrolls.* If the airlines and other especially hard hit businesses need additional assistance to get through the crisis, we can work through a well-designed package that ensures both that shareholders and top executives share the pain and that President Trump can’t use the money to help himself and his friends.

But let’s train our water hoses on where the immediate fire is—low, moderate income households and small businesses with a week or two of cash reserves and little access to credit markets. No question, this is an emergency, but that doesn’t excuse opportunistic, potentially wasteful spending with no oversight. We have important work to do, none of which includes setting up a half-a-trillion-dollar slush fund.

*Technical note: Supporters of this part of the bill argue that because the liquidity for the $500 billion is provided by the Federal Reserve (though one of the “lending facilities” the Fed’s been setting up), it cannot include the same forgiveness feature for maintaining payroll that’s part of small business loan package. The reason given is that the under the Fed’s charter, this would invoke credit risk the Fed cannot undertake. We do not find this at all convincing. First, as with all such lending programs, the Treasury must backstop the Fed’s credit risk. Once they do so, given that the fiscal authorities guarantee the full loan, it is unclear to us why the forgiveness feature is problematic. Other conditions, such as no buybacks, dividends, any payroll maintenance, or even just some oversight should not invoke Fed risk and are thus no-brainers in this context.


Jobs report: Calm before storm as the virus hasn’t hit the job market…yet

March 6th, 2020 at 9:22 am

In yet another upside surprise to the U.S. labor market, payrolls grew strongly last month, up 273,000, well above expectations. Upward revisions to earlier months show that contrary to what many have expected, the monthly pace of job gains has accelerated in recent months. The unemployment rate held steady at 3.5 percent, but wage growth, which has been remarkably unresponsive to strong labor demand, remains a soft spot, stuck at 3 percent, year-over-year, just slightly ahead of consumer inflation which is running at around 2.5 percent.

Calm before the storm

As our smoother shows, averaging monthly payroll gains over various time spans, over the past 3 months, payrolls are up 243,000 per month. Over the past year, they’re up less than that: 201,000. Given that most labor market analysts expected employment gains to slow as we closed in on full capacity in the job market, this acceleration is quite remarkable.

However, there are two counterpoints to this positive development. First, wage growth is also remarkable, but not in a good way: at 3 percent over the past year, it’s surprisingly soft given these job gains and persistently low unemployment rate. Second, as regards the impact of the coronavirus on today’s numbers, it’s important to recognize that jobs reports are coincident, if not lagging, indicators. As of today, clear disruptions to both the global and US economy are growing increasingly clear in the data, from sharply reduced airline traffic, to supply chain disruptions, to falling consumer confidence. Forecasts are even more uncertain than usual in this climate–we still don’t know how many people and places will be hit by quarantines, closed workplaces and schools, or even by Covid-19, the illness caused by the virus.

But that said, my guess is that GDP growth sharply decelerates in at least the first half of this year. In that regard, I view this jobs report as the calm before the storm. There was a slight bump up in involuntary part-timers last month, which could be a harbinger of what’s to come, as labor demand gets hit by virus-induced decreased consumer demand, but it is a distinct possibility that in a few months, we’ll longingly look back on this report.

What’s not up with wage growth?!?

Both figures–the first for all private-sector workers, the second for middle-wage workers–show a deceleration in trend wage growth. How does that square with such a strong job market on the jobs side? One explanation is that this particularly series is weaker than others, but in fact, most series roughly agree that wage growth is, if not slowing down, not speeding up. Another is that workers just don’t have the bargaining clout needed to press for the types of gains we’d expect in such tight conditions. This is surely part of the explanation, though it’s tricky then to puzzle out why wages were growing at a good clip a relatively short while back.

Not at full employment

Another explanation, one consistent with econ 101, is that increased labor supply is meeting strong labor demand. The surfeit of available jobs is pulling new workers in off the sidelines and allowing incumbent workers to increase their hours. Some indicators, especially the fact that employment rates have increased over the past year, suggest there’s something to this explanation. The critical implication is that there’s still “room-to-run” in the U.S. job market. It is not at full employment.

This next figure underscores that case using price data, both the price of goods and labor (i.e., wage growth). The unemployment rate has been below the Fed’s estimate of the lowest rate consistent with stable inflation–their so-called “natural rate”–for about two years! But not only has inflation consistently missed the Fed’s 2 percent target from the downside; we now observe wage deceleration. Based on these relationships, I simply do not think there’s a coherent argument that the U.S. labor market is at full capacity.



Rockefeller Foundation launches an equity/opportunity investment targeting low-income people/places.

February 25th, 2020 at 10:39 am

It’s takes a village–a robust suite of policies and institutional supports–to reconnect a lot of people and places who’ve long been left behind to overall economic growth.

There are roles for government at all levels, with the federal gov’t poised at the top, both in terms of setting policy precedents and financing sub-national initiatives (remember, states can’t run deficits). There are roles for market-oriented, or pre-tax and transfer policies, like persistently tight labor markets and minding the impact of imbalances in credit markets and trade accounts. There are roles for tax and transfer programs, and not just counter-cyclical roles, but investment roles as well. And there are roles for philanthropic foundations, roles that are especially important in ensuring that existing programs both reach eligible recipients and have their intended effects.

In that spirit, the Rockefeller Foundation (RF) just announced a $65 million economic policy and place-based investment in low-income, working families through two major channels: refundable tax credits and Opportunity Zones.

Re the former, RF “will reach at least 4.6 million people at the state level by promoting awareness about the impact of expanding and modernizing the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).” These are, of course, policies we at CBPP have long championed, showing, for example, that they lifted almost 11 million people out of poverty in 2018. Earlier efforts by RF helped make sure eligible households in California and Maine had their earnings boosted through receiving credits for which they were eligible, and the new initiative announced today extends those efforts to eight more states.

The EITC/CTC are, to state the obvious, solidly already up-and-running. That’s not the case with Opportunity Zones, a tax incentive from the 2017 tax cut designed to incentivize patient capital investment in neighborhoods that have long suffered disinvestment. If you’ve paid any attention to this program, you know it’s been highly controversial. My own view is that the program has the potential to lastingly help some places that really need it…or, to become a wasteful tax shelter. The outcome depends on the oversight.

Thus far, the Treasury Dept has failed to promulgate the types of guidelines needed to ensure OZs are getting the most bang for their buck, but it’s still early days. Breathless reports about how the program is already a wasteful failure are totally overblown and premature (though see my colleague Samantha Jacoby’s critiques re too-low tax guardrails).

A key attribute about OZs are the extent of local control they allow and it’s here where the RF’s initiative is targeted. They’re supporting community direct involvement and engagement in 13 cities from the beginning of projects, to make sure jobs and other social and financial benefits go to the people who need them; to pushback on displacement/gentrification, and to derive/track impact metrics.

This is a welcome role for foundations to play in this space. I’m pretty sure OZs are here to stay. The question is whether they’ll realize their potential to offset decades of disinvestment in left-behind places, and one of the best ways to make that happen is to implement as much local control as possible by those who will fight to make sure these investments help the people they’re intended to help.