The Economy
Rocket Ship Recovery or False Dawn?
The Employment Report which was released on June 5th by the Bureau of Labor Statistics (BLS) surprised everyone. Instead of the predicted worsening by an estimated 6.5m lost non-farm jobs, it turned out that 2.5m jobs had been added in May. This, despite the Unemployment Report from a day earlier and released by the Department of Labor showing a monthly increase in May of initial unemployment claims of 1.88m, and a flattening at around 21m of continuing claims.
These seemingly inconsistent data elements will likely be revised but it appears that, far from accelerating job losses, the US is staging an impressive recovery of lost jobs. This article unpacks the Current Employment Statistics and the increase in employment by Sector, and what that means for the prospects for our clients. It also makes some observations about the uneven distribution of recovery across different ethnicities.
Evolving Landscape
As an earlier article The Outlook for the American Economy set out, Demand and Supply are two sides of the same economic coin, and predicted that Supply constraints could be more easily overcome than Demand constraints and altered consumer behavior. In May, employers seem to have increased the Supply of workers in their premises, presumably in anticipation of an increase in Demand. Whether, and to what extent, that Demand comes back will be examined as data is reported; the Fed is due to report its outlook shortly, and the CBO’s next scheduled release of GDP forecasts is due in August.
With respect to the employment figures, there are a few factors all at play; they include:
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The states have been relaxing their social distancing requirements and thereby opening the economy
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The CARES Act provided some much-needed relief for both the newly unemployed and for Small Businesses. However, in so doing, it also provided some perverse incentives regarding unemployment, to both the workers and the employers.
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America is becoming more used to the COVID-19 virus and much of the earlier anxiety has abated somewhat, as the “curve has been flattened” and the requirement to get on with life has dulled the fear of losing it.
Private and Public Sector Dynamics
The resurgence in jobs needs to be set against the earlier decline in employment. The private sector had reduced its jobs by a massive 16% in the two months between February and April – losing 21m jobs. Public jobs had reduced by a much more modest amount – 4.3% (1m). As the shutdowns started to ease across the county, the private sector recovered a small percentage (3m) of those lost jobs, whereas the Public Sector continued to lose jobs at a similar rate as previously (600,000).
It would seem a reasonable hypothesis that state governments, with a legal requirement to run a balanced budget, and in the face of plummeting receipts and soaring expenditures, are by necessity cutting costs aggressively. In our highly partisan climate, and in an election year with much at stake for both parties, we can expect ongoing political gridlock on the topic of providing further federal support to state finances, and it is probable that the resurgence seen in the private sector will not be mirrored in the public sector. This will continue to exert pressure on state and local governments to secure cost savings.
Private Sector Performance
Those Sectors that were most gravely affected by the economic shut-down are among those showing the greatest recovery. Within them can be seen some truly frightening numbers of employment losses between February (before the shutdowns started) and its nadir in April. Food services lost nearly half of its employees; Clothing stores nearly two-thirds, and Personal and Laundry services over half. So, it comes as little surprise that these Sectors are among the first to recover. Even so, these Sectors together have recovered only 22% of the jobs they lost, and employment in them still runs at 19% lower than it did in February.
The chart below shows the fifteen largest 3-digit Sectors, which together comprise half of total US employment. All these Sectors shed jobs between February and April (the x-axis); Sectors to the left of the y-axis continued to shed jobs in May, while Sectors to the right added jobs. The bubble sizes correspond to the number of people employed in that Sector in February, before the pandemic started to wreak havoc on US jobs.
The chart vividly illustrates the outsize impact Sector 722 – Food Services and Drinking Places had on the decline and rise of US employment. It employed about a twelfth of US workers in February, and lost half of its workers to April, and still runs at 38% less in May than it employed in February. It was the single biggest contributor to the lift in employment with an increase of 1.37m, more than half of the net total increase in May.
The next biggest contributor was 621 - Ambulatory Health Care Services – within which exists Offices of Dentists – 6221. 621 saw an increase of 375,000 jobs (5.8% increase) of which a stunning 245,000 were Dentists' Offices, whose employment went up 56% over April. Perhaps unsurprisingly, only the Federal Government, Garden Supply outlets, and Liquor Stores have added employment since February.
Smaller private sectors, not shown on the graphic, which continued to struggle in May include Accommodation losing 148,000 jobs (12.6% of its April workforce), Electronics and Appliance Stores (losing 95,000 jobs – 21.8%), and Air Transportation (50,000 jobs – 11.6% of workforce).
Accommodation and Food Services – NAICS 722
I want to elaborate on the CARES Act and how Food Services may be affected by the Act. The CARES Act included a couple of provisions which may have influenced the precipitate decline in jobs and the stunning recovery. It sought to help both affected individuals and affected businesses.
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For individuals, the CARES Act included enhanced unemployment benefits, including extending eligibility to 39 weeks from 26 (through year end), and adding an additional $600 a week, which expires on July 31.
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For small businesses, the Act provided an initial $349b of loans to Small Business Organizations, followed by a further round in April which added another $320b.
The Accommodation and Food Services Sector (722) has a couple of peculiarities that may make it an unreliable indicator for the rest of the economy.
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Of the $669b allocated to the Paycheck Protection Program (PPP) of the CARES Act, $511b had been approved by the SBA as of June 6, of which $41b (8% of total allocated funds) was allocated to Accommodation and Food Services. This Sector was the only one called out in the PPP to allow organizations with more than 500 employees to be eligible for the program, provided they had less than 500 in any location. These loans were 100% forgivable provided the organization met a variety of criteria. Among other considerations, an organization could only be forgiven in proportion to the workers it had on June 30 compared to the appropriate baseline period prior to the pandemic. Furthermore, 75% of the loan needed to be used on paying wages for the loan to be forgiven. The launch of this program was riddled with difficulties, and many small businesses shed jobs rapidly to protect their cash-flows. Once small employers gained faith that the loans would indeed come through, and they needed to use the loans for pay in order to have the loan forgiven, they had a strong interest in attracting back workers, to have a full complement of workers on June 30, and to expense the requisite 75% on wages during the 8 weeks following authorization of the loan.
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Food Services employees are among the lowest paid workers in the US economy; only Nail Salon workers are paid less. BLS reported that, in April, average hourly earnings in Sector 722 of $15.81. In comparison, full Unemployment Unemployment Pay ranges from $235 a week in Mississippi to $742 in Massachusetts. In addition, the CARES Act added a further $600 a week. As such, employees in the Food Services Sector found themselves receiving roughly twice as much for being unemployed as being employed ($20.88-$30.50 an hour). Despite delays in states sorting through applications, the claimants will eventually receive this enhanced compensation for not working.
It is not possible to determine whether and to what extent the differing pressures on employers and workers in Sector 722 may have skewed behaviors in May, but there is a plausible case that both employers and employees found it to their advantage to lay people off through March and April, and then for employers to seek to re-engage them as the PPP forgiveness deadline of June 30 loomed, and the need to accrue 8 weeks of pay incurred.
Demographic Differences in Recovery
The May recovery appears to have been enjoyed disproportionately by white Americans,who got 17% more of the recovered jobs than their population weighting would suggest. By contrast, African Americans get around half the jobs one would expect on an equitable recovery, and Asian Americans continued to shed jobs.
Similarly, white workers have been less hard hit than other Americans by the economic slow-down, with employment running at 87% of the levels that existed in February. Other ethnic groups have recovered less well (the Table below shows workers 20 years and over).
This relative disadvantage affecting people of color is yet one more challenge being experienced by communities which already suffer from material disadvantages in our society.
Too Soon To Say
While the June 5 Employment Report is being hailed in some quarters as indicating the start of a V-shaped recovery, it is still too early to confidently predict that Supply will continue to rebound as quickly as the Report suggests. Supply will inevitably balance to meet Demand; it remains unclear how quickly Demand will recover, and so we reserve our judgment until we see data supporting the Demand recovery also. In the meantime, the US economy continues to struggle from the consequences of the pandemic despite the easing of social distancing measures, with many sectors continuing to shed jobs, and many communities continuing to suffer.
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