No one saw it coming. Instead of showing that millions more Americans had lost their jobs in May, the latest employment report showed that payrolls rose by 2.5 million as the U.S. economy began to reopen after months of business shutdowns and consumer quarantines.
The stock market rightfully celebrated what was the biggest labor-market surprise in history and, more importantly, evidence that rehiring the more than 22 million people who have become unemployed since March is under way. The S&P 500 (.SPX) climbed 2.7% Friday, leaving it up 5% on the week and all but erasing its year-to-date loss, and the Nasdaq Composite (.IXIC) notched an intraday record high.
It is too soon, however, for investors to let their guards down.
The headline numbers look great, but it’s going to be a long road to recovery, says Gregory Daco, chief U.S. economist at Oxford Economics. It is a positive development that we’re starting out on that road earlier than economists predicted (on average they expected nonfarm payrolls to decline by eight million in May). But Daco says investors shouldn’t lose sight of the fact that we’re still 20 million jobs in the hole and facing an unemployment rate that, at 13.3%, is four times as high as a few months ago.
Nor should investors forget that some of the gains were surely driven by temporary fiscal-support programs, or that the possibility of a second wave of contagion looms as states reopen. Even if you look past the still-sky-high unemployment rate that fell from April, a broader, more meaningful measure of unemployment that captures part-time workers is sitting at 21.2%. What’s more, the headline figure only slipped on the surface, masking a rise to over 16% because of what the Labor Department says is a problem with how survey respondents characterize their absence from work.
One reason Daco says investors shouldn’t be overly euphoric: He forecasts just 60% of the jobs claimed by the coronavirus pandemic will be recovered by year’s end, translating to about 13 million still out of work and an unemployment rate of about 10% heading into 2021. That we’ve already recovered 2.5 million of the lost jobs is reassuring, but it will take time to determine how many of those rehired remain on payrolls and how quickly the pace picks up.
Uncertainty surrounding the pace of future hiring and the stickiness of last month’s jobs gains stems in part from the Payroll Protection Program, part of the Cares Act meant to encourage small businesses to rehire furloughed workers. For the loans to be forgiven, companies have needed to use 75% of the funds to rehire workers by June 30. A bill signed on Friday by President Trump relaxes those restrictions, potentially helping more small businesses survive the virus shock, but it also may result in a rehiring delay. Moreover, companies that hired back workers in anticipation of the original deadline could shed some of those employees once their PPP loan is forgiven.
To that point, the Labor Department said in its May report that workers who were paid by their employer for all or any part of the pay period including the 12th of the month were counted as employed, even if they weren’t actually at their jobs. As anecdotal reporting by Barron’s has shown, some employers have paid workers with PPP funds even as they remained closed or faced little to no customer demand. All of that shows the program has been working, but it raises questions about the sustainability of the jobs it has helped fund—especially if sweetened unemployment benefits expire as planned in July and millions remain unemployed at a time when the U.S. economy is as dependent as ever on the ability and willingness of consumers to spend.
In a sign of the pain across the small-business sector, which accounts for about half of overall employment, 10% of small firms have already missed a loan payment, says Aneta Markowska, chief economist at Jefferies. If just 1 in 10 small businesses fails, it would destroy over six million jobs, or 5% of all U.S. employment. And while the PPP has increased the chances that more small businesses survive the virus-driven recession, Markowska notes that the funds have so far helped only about 15% of small companies.
Meanwhile, the protests and riots that have swept across America over the past two weeks reflect the inequity that lived beneath the surface of solid labor-market numbers long before the pandemic struck. Such strains have been exacerbated by the virus, as shown in the latest jobs data, as the virus and lockdowns meant to slow its spread have disproportionately hurt lower-income and minority communities. The unemployment rate among blacks ticked up to 16.8% in May from 16.7% in April, while the unemployment rate among whites fell to 12.4% from 14.2%. The unemployment rate among blacks going into the crisis was double the rate among whites, with whites earning about 26% more, according to BLS data.
It’s clear that the bulk of workers pulled back into the labor market during May were from sectors hit first and worst from the shutdowns. Employment in leisure and hospitality, for example, increased by 1.2 million, following losses of over eight million since March. The quicker return of workers to these industries, often lower-paying and with a relatively high concentration of minority workers, is a reason for optimism. But it should come with a dose of caution. Daco says September and October will be good guides for assessing how well the economy is recovering, offering better insight into whether recent job gains stick and can be built upon quickly.
Until then, a breather might be warranted for investors. “I’d be cautious,” Daco says, calling markets expensive and valuations stretched. Markets have good reason to blow off the bad and rally on the good, given promises by the Federal Reserve to aggressively intervene. But the Fed can’t create consumer demand, and fiscal aid will eventually expire, leaving an economy that must be able to absorb millions of workers before it can be declared back to normal.
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