KEY DATA: Payrolls: -20.5 million; Private: -19.5 million; Manufacturing: -1.3 million; Leisure and Hospitality: -7.7 million; Health Care: -2.1 million; Retail: -2.1 million/ Unemployment Rate: 14.7%; Labor Force: -6.4 million; Unemployed: +15.9 million
IN A NUTSHELL: “The employment declines were historic and the unemployment rate hit a post WWII record, so it is hard to find anything good in this report.”
WHAT IT MEANS: Welcome to the world of pandemic economic numbers and they aren’t very pretty. The April employment report was expected to set records and it did. Let’s start with the jobs situation. The 20.5 million payroll decline was the largest for any single month or year. The declines were so broad based that fewer than five percent of the 258 private industries posted a payroll gain. Even at the worst point in the Great Recession, over fifteen percent of the industries posted gains. The loss leaders were, as expected, leisure and hospitality, retail and manufacturing. Health care took a huge hit and that included hospitals. Emergency/Covid-19 care requirements could not overcome the loss of demand for every other type of health care service as people stopped going to doctors and dentists, except in emergencies. The only private sector industry that posted a rise of any significance was retail warehouses, such as Costco and BJs. Otherwise, it was basically all red. There was also a data calculation issue. BLS noted that, “Business births and deaths cannot be adequately captured by the establishment survey as they occur”. I suspect that in this shuttered economy, the death rate is a lot higher than normal while the birth rate is significantly lower. That implies a larger decline in total payrolls than estimated. But the estimation process could not capture that change in behavior, so consider the job loss a lower bound. The real job loss number was likely a lot higher, though it is impossible to know by how much.
As for the unemployment rate, it did not rise to as high a level as projected. But that was due to the some special circumstances. First, the labor force collapsed. Over the past two months, 8.1 million people have left the labor market and most of those workers are likely unemployed. They just didn’t see any reason to look for jobs since there weren’t any, so they were not counted as unemployed. That alone could have added almost five percentage points to the rate. There were other data collection/identification/classification issues as well, including rules that determine how to determine whether a person who is not working is employed or unemployed. In a special comment in the report, BLS noted the data collection and identification issues and pointed out that “If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis)”. Simply put, the 14.7% rate is a lower bound and the “real” number is probably close to 20%. Indeed, the so-called “real unemployment rate” was 22.8%. This includes people who gave up looking for jobs, which is a real issue now.
There were a couple of other interesting (odd?) numbers in the report. The average hourly wage soared by 4.7%, compared to a couple of tenths that is normal. Also the workweek rose. It looks like low-income workers bore the brunt of the job losses and people who could continue working either picked up hours or if they worked from home, kept their hours. Finally, the labor force participation rate fell to its lowest level since January 1973. That was the start of the Baby-Boomers surge into the labor force.
IMPLICATIONS:As bad as the data were in April, the problems with classification and collection, as well as the continued surge in jobless claims, indicate that the job loss and unemployment numbers were lower bounds, not accurate measures of what really is going on.It is likely that the May unemployment rate will approach if not exceed 20%, that it probably was already in April. I would not be surprised if investors are celebrating the lower than expected unemployment rate, but if they are doing so, they are misreading the data. But there is a threat to the markets from the underestimation of the unemployment rate due to the declining labor force. Once the economy starts reopening and job losses fade, the workers who left the labor market will start returning. That would slow the decline in the unemployment rate. If investors are expecting a rapid drop in the rate, they are likely to be greatly disappointed. And once the data collectors start getting more information on births and deaths, we will probably see job gains grow more slowly, as bankruptcies are likely surging. The point is that the labor market is in even worse shape than these terrible numbers indicate, which as I have noted before, means it will take longer to dig ourselves out of this hole.