The U.S. job market added back 2.5 million jobs in May, much to the surprise of economists and pundits, who were expecting a decrease of 7.5 million jobs. The improvements in leisure & hospitality, construction, health care, retail, and manufacturing industries’ employment situation reflect a limited but positive resumption of economic activity that had been heavily restricted in March and April due to the coronavirus pandemic and efforts to contain it. Hopefully, this momentum builds steam as cases abate and business reopening progresses. We may need it to advance organically as the government has already distributed 70% of direct stimulus aid with no plans in place for further measures.
What was already a good week for stocks and risk assets got better on Friday with the Bureau of Labor Statistics’ release of the May employment report. Total nonfarm payroll employment increased by 2.5 million in May, and the unemployment rate declined by 1.4% to 13.3%. The May jobs report features some of the first official employment data indicating the resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic.
As I wrote last week in the Weekly Strategic Insight, the weekly initial unemployment claims data showed that we may be close to a tipping point. Even though large numbers of people were still filing initial claims, the number of continuing claims showed a significant drop. However, economists were still projecting a bleak May report and an unemployment rate approaching 20%. The median economist projection was for a loss of 7.5 million jobs, and of the 78 economists surveyed by Bloomberg, the most optimistic forecast called for an 800,000 decline. That set up a nice upside surprise for the market when the actual reported figure was positive to the tune of 2.5 million. Market returns = reality – expectations (even low ones).
As for the content of the report, restaurants & bars showed the biggest rebound and were responsible for all of the gains of the leisure & hospitality industry, followed by construction, health care & social, retail, manufacturing, and professional services.
The rebound in restaurant & bar jobs speaks well to the efficacy of the Payroll Protection Program (PPP), which was a forgivable loan program funded in the CARES Act for small businesses to maintain payroll levels. Although it took time to get distributed to eligible businesses, those funds appear to be having the desired result. The restaurant & bar industry tends to have a higher concentration of small business owners.
On the detractor-side, government jobs decreased by 585,000. However, this may not be as bad as it appears. Most of the losses were because of early school closures affecting local and municipal education jobs. Teacher jobs will be a strange anomaly this year. The Bureau of Labor Statistics (BLS) makes seasonal adjustments for jobs including 2+ million teachers rolling off payrolls at the beginning of summer and then coming back at the end of summer. However, due to early school closures this year, 1.2 million teaching jobs have been reported as lost in March, April, and May, which is not seasonally adjusted. That means June and July data will need to report an increase of almost 1 million teaching jobs to account for normal adjustment patterns.
Along that same line of oddities and in full disclosure, the BLS made a footnote that there are a number of people that have been classified as “employed but absent from work” when they probably should have been classified as “unemployed on temporary layoff” for coronavirus-related business closures. They recognized the potential data issue for both March and April, so at least it is consistent month-to-month. However, those jobs could potentially add another 3% to the overall unemployment rate.
Of the total unemployed people surveyed, 73% expect their layoff to be temporary which could bode well for the next couple of months of employment data if shelter-in-place orders are relaxed and health phases/capacity constraints progress.
The hope is that May’s rebound is just the start of a broad and even more well-sustained increase in labor demand relative to the shutdown in March and April.
The concern is that Payroll Protection Program funding was only 2½ months of payroll, and those recipient businesses were compelled to distribute it to employees in the first 8 weeks after receiving the loan proceeds to qualify for forgiveness. In some cases, those businesses weren’t open and/or generating revenue to help offset other expenses. For those businesses that are still in the hole or operating at partial capacity, they may make cuts when PPP funds are depleted. If further fiscal policy support doesn’t arrive, the rebound in employment may be slower than the rapid recovery anticipated.
With major domestic stock market indexes soaring to near full recovery (!), the political environment for additional stimulus will be more difficult. Congress has passed four pieces of emergency legislation authorizing approximately $3.3 trillion of stimulus spending and tax breaks. This week, the Wall Street Journal reported that Republicans and Trump administration officials would prefer to pause further measures and assess existing programs, in part, due to the ballooning budget deficit. Of the total $1.6 trillion in direct stimulus spending provided in the CARES Act, approximately $1.12 trillion (70%) has been distributed, according to the WSJ and Committee for a Responsible Federal Budget, a bipartisan nonprofit group.
Congress did rise to the occasion this week by passing the Paycheck Protection Flexibility Act, which provided business owners with some flexibility in administrating their PPP loans while still qualifying for forgiveness. Hopefully, they can come together again if needed to provide additional stimulus measures to support economic recovery.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist