US Jobs Numbers: Good Sign But Not a Victory Flag

By Mohamed A. El-Erian

(Bloomberg Opinion) -- Although the better-than-expected U.S. employment numbers that came out on Thursday give reason for optimism, it is far too early to declare victory over the threat of further economic damage. Yes, the jobs report and other data released last week illustrated the kind of impressive across-the-board recovery that the economy is capable of. But the durability of this much-needed recovery — and, with that, the sustainable recovery of the global economy — is unlikely to be firmly established without a few more iterations in the historically tricky process of learning how best to live with Covid-19.

The surprisingly strong jobs report for June followed what many others and I felt had been the biggest data surprise ever witnessed by economists and Wall Street analysts — the previous month’s report.

The 4.8 million net new jobs in June were almost twice the 2.5 million in May. It’s a record-setting outcome that came well ahead of the median consensus estimate of 3.1 million, itself subject to a wide variation of individual forecasts, falling essentially in a range of 900,000 to 5 million.

The nearly 2 percentage point drop in the unemployment rate to 11.1 percent was noticeably better than the expected 12.5 percent. And with the Bureau of Labor Statistics indicating that the possible extent of misclassifications had been reduced to 1 percentage point, it pointed to an impressive 7 percentage point drop from the implied April high of some 10 percent.

Signs of a strong labor market recovery went well beyond these widely cited headline numbers. Both labor force participation and the employment-to-population rates showed healthy increases, rising to 61.5% and 54.6% respectively. Moreover, every segment of the population experienced a decline in unemployment, including the one that missed out May’s improvement, Black workers.

Two other important data releases last week also pointed to a strong bounce in economic activity.

The ISM index of factory activity for June rose by a stunning 9 percentage points to 52.6, beating the consensus estimate of 49.8, powered in part by the critical orders component. This jump in a widely followed supply-side indicator was accompanied by an equally notably rise in an important demand-side indicator: the surge to 98.1 in the consumer confidence index, up from last month’s revised 85.9 and beating an expected 91.5.

Such data warrant optimism about the resilience and agility of the U.S. economy in the face of the economic devastation wrought by the Covid-19 shock, let alone the pain and suffering associated with its debilitating and often-too-deadly health effects. They also come as a relief to more open economies around the world, including China and Europe, whose own data pointed to domestic economic improvement.

But extrapolating all this good news forward is subject to five sobering qualifications.

First, the economy is still early in recovering back to pre-Covid-19 conditions. As impressive as the record two-month tally of more than 7 million new jobs is, it constitutes only a third of what is needed to fully reverse the March-April carnage in employment. The employment-population ratio remains well below its February level.

Second, some other data flashed more yellow than green signals last week. This included continuing jobless claims, which rose to 19.3 million, above the expected 19 million, as new claims amounted to a still worrisome 1.43 million. Other high-frequency indicators of economic activity also painted a concerning picture, include the national decline in retail traffic and the increasing number of states experiencing lower mobility.

Third, indications are surfacing daily that layoffs are migrating up from small- and medium-sized firms to larger ones as a growing number of these companies talk about “right sizing” for the economy ahead. Airlines led the way last week, with announcements of additional layoffs by American and Air France-KLM, along with new bankruptcies for some Latin American carriers, but this sector is not an exception but rather a leading indicator.

Fourth, the scale and scope of corporate bankruptcies are expanding beyond the list of usual suspects — companies that entered the Covid-19 shock with vulnerable balance sheets or whose business evaporated for a long time or both. 

Finally, over the weekend a number of states, including some of the country’s largest such as California and Texas, either halted or reversed more reopenings in response to record new Covid-19 infections and concerns about declining hospitalization capacity. But it was far from a generalized process with a particularly notable exception: Florida’s state authorities resisted the re-closing process despite daily infections topping 11,000, beating the daily record of just more than 10,000 from the previous Tuesday.

Together, this supports the view that, rather than constitute a smooth linear process, economic recovery is likely to be bumpy as companies, households and governments look to strike what is an inevitably uncertain and fluid balance between economic activity and public health.

Over the next three months or so, the U.S. economy is unfortunately likely to experience a notable moderation in what has been an impressive rebound before once again being in a position to pick up significant steam overall. And this may not be the end of this stop-go-slow-go cycle. But assuming Congress acts to maintain relief measures in a more-targeted and pro-work fashion, as well as initiate work on longer-term policies to bolster productivity and household economic security, these fluctuations should occur in a narrowing band as health and economic experts work in concert to strike a sequentially improving balance overall. 

First posted on Bloomberg Opinion on July 5th: https://www.bloomberg.com/opinion/articles/2020-07-05/covid-19-job-numbers-are-a-good-sign-but-not-a-victory-flag?sref=hf7usq67