The May employment report was very encouraging…
…but the economic hole is deep.
It’s official, the record expansion peaked in February.
Our outlook:
The bottom line is that we should feel better about the economic outlook, but not great. Via Nova’s take on the May jobs report is that the news was unequivocally good, and the report may suggest that the economic low is in place. However, the stock market rally leading up to and following the report may reflect excessive optimism on the pace and breadth of the recovery (see our recent comment). The damage from the shutdown has been substantial, and the pace of recovery could remain sluggish based on the gradual reopening directives we have seen so far, business closings, lingering concerns about safety, and willingness to “unlearn” our stay-at-home habits.
The May employment report was very encouraging…
Let’s start with the good news. The total number of jobs reported by all employers jumped by a record 2.5 million in May “reflecting a limited resumption of economic activity that had been curtailed due to the coronavirus pandemic and efforts to contain it,” according to the Labor Department. Also, the unemployment rate fell by 1.4% to 13.3%, though still extremely high relative to the 3.5% level only a few months ago. To put the relative strength of the report in perspective, economists were forecasting an 8.3 million decline in jobs and an increase in the unemployment rate to 19.5%.
In addition, average weekly hours worked increased, which should help boost personal income when it is reported later this month. Hiring was broad-based. Manufacturing jobs increased as did construction employment, but the biggest gain came in the leisure and hospitality industries, which tend to be lower wage jobs. Ironically, the large job gains in leisure and hospitality helped push average hourly earnings down for the month, but we do not see that as a troubling development but rather as good news that many of the individuals hit hardest by the lock down are getting back to work. The weakest sector was government, which lost 585,000 jobs concentrated in local government education.
…but the economic hole is deep.
We expect employment growth will continue in the coming months as part of our forecasted second half economic rebound. But while we are optimistic about the coming economic trend, the shutdown put the economy in a very deep hole, and the reopening process is proceeding only gradually. Specifically, the record job gain in May still left total U.S. employment roughly 20 million below the February high, so a full recovery is likely some way off.
It’s official, the record expansion peaked in February.
It’s now official, the U.S. economy peaked in February after expanding for a record 128 months, though that is old news. The National Bureau of Economic Research (NBER) is the recognized arbiter of economic peaks and troughs, and they announced their findings on June 8, the quickest evaluation turnaround on record. The proclamation came as no surprise to anyone since the downturn has been so abrupt and severe. Given the surge in employment growth last month, the NBER may decide the economy is bottoming in what could be the shortest downturn on record. That official determination may take a few months, however.
Our outlook:
Looking forward, we still expect another round of fiscal stimulus in the near term to accompany a partial easing of economic restrictions at the state level. Ironically, the strength of the May employment report may delay passage of new tax rebates and loan programs, but that is not our most likely scenario at present. We do expect the Federal Reserve to keep interest rates low and to continue and expand their lending initiatives. The continued reopening of businesses combined with supportive fiscal and interest rate policies should keep the economy in an upward trend through the end of the year and into 2021.
We are pleased the stock market has rebounded sharply since the end of March, but the recent exuberance may be overdone. The outlook for corporate profits remains very uncertain, and many companies that are reopening stores have announced that other stores will remain closed and the accompanying layoffs will be permanent, delaying a full recovery in profits. Some companies are likely to thrive in the coming quarters as consumers continue adjusting to the current reality, but aggregate profitability does not support such a broad and rapid rebound in share prices. A summer slowdown in the markets is possible, but it should not derail the longer-term recovery.