Labor Of Love

Labor of love.  Stocks had a mixed close yesterday as several states rolled back reopenings. Good news on the virus vaccine front combined with good economic data offset frightening virus headlines.

 

N O T E W O R T H Y

 

Nose to the grindstone.  It’s jobs day on steroids.  The Department of Labor is good enough to provide us with a weekly read on the job situation from the prior week, making it a good gauge of current employment conditions. Once a month, the Bureau of Labor Statistics releases its monthly employment situation which includes a barrage of workforce statistics from the month, just ended.  Though not as current as the weekly report, the BLS figure is the one most closely watched and includes the Unemployment Rate.  The weekly numbers come every Thursday while the monthly number is typically released on the first Friday of each month.  With markets closing tomorrow for the Independence Day Holiday, we will get both the weekly and monthly numbers this morning.  I am sure I don’t have to go deeply into why economists are so obsessed with labor markets, but let us just leave it with: more people working is always a good thing.  Historically, employment ebbs and flows with economic output and its direction, generally speaking, is relatively predictable. As the economy flourishes, more and more workers are employed, bringing rates down.  When the economy contracts (recession), companies faced with lower demand and revenues typically cut back their workforce in order to control losses.  Hence, unemployment typically rises quite quickly throughout a recession.  As the recession ends and companies start to experience new growth, hiring picks up again and the unemployment rate begins to fall again.  If you look at the attached chart from the Bureau of Labor Statistics, you will note that unemployment increases rather sharply at the onset of recessions (denoted in grey shaded areas on the graph), they peak right around the end of a recession, then they slowly fall back to their lows. There are two takeaways from that.  First is a concept that economists refer to as the natural rate of unemployment, that is when all jobs are filled and almost everyone who is looking for a job can find one.  To be clear that rate is never 0% as someone is always looking for a job, like fresh-out-school job seekers or those displaced due to lack of current skills.  That base level really represents workers who are not unemployed for changes in economic conditions.  That level changes over time, rising when many workers’ skills become obsolete (1980’s computer revolution) and falling when completely new areas of work emerge (recent emergence of gig economy).  As you might guess that number has been falling for some time.  In other words the employment situation in the US has been improving.  The Unemployment Rate topped 10% by the end of the Great recession and slowly, but surely, ground down to 3.5% last year, a level not seen since the 1960’s.  That brings me to the second takeaway from the chart, which is the pattern of the ebbs and flows. What is notable there is how quickly unemployment spikes up and how slowly it takes to recover back down to equilibrium. Unemployment last spiked in 2010 and it took nearly 10 years to hit its pre-COVID lows. Looking at the chart, one can see that a similar pattern prevailed in prior recessions.  The current crisis is like no other in modern times.  Government mandated closures exacerbated sharp drops in demand from consumers simply staying away.  The result was a record unemployment rate of 14.7% in April of this year.  In an attempt to lessen the shock, both the Federal Government and the Fed deployed unprecedented stimulus, which prevented a further rise.  In May, the rate dropped slightly to 13.3% from its prior month’s high.  This morning, economists are expecting the number to be yet lower at 12.5%. That would hopefully mark the beginning of a trend which will ultimately lead the labor market back to that elusive natural rate of unemployment.  However, if the past is any sign of the pace of this recovery, patience will take on a whole new meaning.  In the last recession, unemployment was around 5% at its onset in December 2007, and it wasn’t until December 2015 that it returned to that level, a full 8 years.  We have been using the “these are not ordinary circumstances” line quite a bit recently.  Perhaps the abnormally quick spike will be followed by an abnormally quick dip.  These are not ordinary circumstances.  The bevy of labor numbers is due to be released this morning at 8:30 AM EDT.

 

THE MARKETS

 

New virus cases are on the rise and many states are rolling back their reopening schedules but positive news from vaccine trials from Pfizer (PFE) helped markets gain some ground in a mixed close.  The S&P500 traded up by +0.5%, the Dow Jones Industrial Average slipped by -0.30%, the Russell 2000 was flat, and the Nasdaq Composite Index advanced by +0.95% to a new high.  Bonds slipped and 10-year treasury yields climbed by +2 basis points to 0.67%.

 

NXT UP

 

– Nonfarm Payrolls (June) are expected to have increased by 3.058 million compared to last month’s addition of 2.509 million jobs.

– The Unemployment Rate (June) is expected to come in at 12.5%, down from last month’s 13.3%.

– Initial Jobless Claims (June 27) are expected to be 1.350 million, down from the prior week’s 1.480 million.

– Continuing Jobless Claims (June 20) are expected to be 19 million compared to the prior week’s reading of 19.533 million.

– Factory Orders for May are expected to have rebounded by +6.5% after falling by -8.5% in the prior month.

– A final read for May Durable Goods Orders is expected to show an increase of +15.8% in line with prior estimates.

– Equity and bond markets will be closed tomorrow for the Independence Day Holiday.

 

daily chartbook 2020-07-02

historical unemployment rate