Economics The recovery in US employment is slowing just as fiscal stimulus fades

US unemployment rate dropped to 10.2% in July, better than most expectations. But employment recovery is slowing. In many industries, businesses are not re-hiring as fast as they before, & payrolls are well below pre-COVID-19 levels.

10 Aug 2020

Around 40% of the labor market losses have been retraced. The recovery has a long way to go.

Source: BLS, UBS

This column chart demonstrates how much of the labor market losses have been retraced from their peak.

Payrolls rose 1.76 mil. But the employment report raised a number of doubts.

US payrolls rose 1.763 million in July, and the unemployment rate dropped further than we expected by 0.9 pct pt to 10.2%. However, the recovery in employment is slowing in important ways. In many industries, businesses are not re-hiring as fast as they were in recent months, and payrolls are still well below pre-COVID-19 levels. Among households, there were some signs of discouragement about the labor market. The slower improvement in the Employment Report comes just as fiscal stimulus fades.

The improvement is slowing. Employment and incomes are still depressed

The rebound is slowing, and private-sector payrolls are less than halfway back to pre-Covid-19 levels. Private payrolls fell by 21.2 million from March to April. They reversed 3.2 mil of the decline in May and 4.7 mil in June, but the rebound slowed to +1.5 mil in July. In July private payrolls were still 9.1% below their February level, and aggregate payroll incomes were 6.0% below February.

The goods sector is stalled

The goods sector stalled. Payrolls were 6.0% below pre-Covid-19 levels, little changed from the -6.2%  in  June.  Despite  a  surge  in  motor  vehicle  output,  motor  vehicle  manufacturing payrolls only inched up, still 7% below pre-COVID-19; and nonauto factory payrolls slipped 0.1%. Construction payrolls were soft despite the recent surge in housing demand; business-sector and public-sector construction appear to be faltering.

In the services sector, rapid growth almost only where the damage was worst

Services sector employment rose in line with our expectations but was still 8.8% below pre-COVID-19 levels. Leisure and retail picked up, but it might merely be those firms’ attempts to stay in business---these were the industries with the greatest damage after the mobility restrictions in recent months. Employment in leisure and retail rose less than in May or June---the re-opening is slowing down.

A broad rebound in services employment is still missing. The industries with low work from home rates are improving as the economy reopens. In July, we saw employment growth in the lowest work from home sectors of 2.1% (leisure, retail, other services). But businesses are hesitant, and the hesitation shows in only 0.1% employment growth in the higher work from home sectors (information, financial activities). Slightly more positively, temp employment rose. Businesses are at least considering a re-start.

Job losers are falling out of the labor force

The unemployment rate fell in July, but the labor force participation rate also declined, interrupting the recovery of the prior two months. There has been massive job loss since February. If job losers fall out of the labor force, the return to recent levels of output will be much slower. We saw that kind of labor market scarring in the slow expansion after the last recession. We are watching the participation rate carefully for signs of similar scarring this time. In February, it was 63.4%. It bottomed at 60.2% in April, rose to 61.5% by June, but inched back to 61.4% in July---not a positive sign.

Fiscal stimulus is being cut back sharply

Just as the employment rebound is slowing, the fiscal policy support for spending is slowing. CARES act income support through supplement unemployment insurance ran out at the end of July. Congress is considering extending the supplemental benefits but is having difficulty coming to an agreement.

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