Breaking down the employment situation

A perspective from E*TRADE Securities 07/09/20

An unemployment rate of 11.1% doesn’t exactly sound like something to celebrate, especially considering just four months ago the jobless rate was hovering near a half-century low of 3.5%. But after a global pandemic wiped out roughly 22 million jobs in just two months, this feels like a small victory.

Jobs are, obviously, important. And not just for workers, but the economy. Jobs mean wages, which pad the wallets of consumers, who power roughly 70% of the American economy. What’s more, jobs numbers are arguably the most watched data point for the Federal Reserve, which determines monetary policy around its goal of promoting maximum employment.

So, for investors looking to develop a solid understanding of the economy and stock market, knowing what’s happening in the labor market is essential. Let’s break down the latest employment report and what it may mean for the markets.

The headline

The US economy added 4.8 million jobs in June—the biggest monthly gain since the government began tracking the data in 1939, and well above the three million economists had been anticipating.1  In addition to the 2.7 million jobs gained in May, the labor market has recovered a third of what it lost in March and April—the height of the virus-induced lockdown.

Despite the better-than-expected rebound these past two months, the job losses that preceded them were massive, and the current unemployment rate is still the third-highest (only behind April and May) level of the past 70 years. 

Source: US Bureau of Labor Statistics


Gains in hard-hit industries

Much of the growth came from industries that suffered outsized losses in the early stages of the pandemic. Leisure and hospitality accounted for nearly 40% of the total gains for the month. Food services hiring grew by 1.5 million, and retail recouped 740,000 jobs. Other areas of notable growth included education and health services, manufacturing (particularly auto parts), and construction.2

On the other side of the scale, state governments, who are facing reduced tax revenues and increasing costs associated with combating the coronavirus, continued to lay off workers.1 Employment also declined in mining, nursing care facilities, and computer systems design.

The fine print

At face value, the headline numbers paint a picture of an economy firing on all cylinders after being stuck in the garage for two months. But key details suggest the story is far from over. For example, the headline unemployment rate was likely understated due to a classification error in who was considered employed vs. unemployed—meaning the current rate is probably closer to 12.1% (and was more like 16.3% in May vs. the reported 13.3%, and 19.7% in April vs. 14.7%).3

Also, the data collected in the latest report doesn’t reflect the final two weeks of June, which saw a significant spike in coronavirus infections that caused several states to halt reopening plans and even backtrack in some cases. Three of the states experiencing the biggest spikes—Texas, California, and Florida—are among the country’s largest state economies.

Meanwhile, new claims for state unemployment benefits remain persistently high, topping one million for 16 straight weeks. Continuing claims, or the number of people requesting an extension of jobless benefits, have been hovering near 20 million for several weeks—a harsh reminder that Americans are still losing jobs and out of work even as the economy begins to broadly heal.  

Source: US Bureau of Labor Statistics


Investor considerations

While the job gains in May and June may be a positive sign that the economy is on the mend, employment numbers are still far below pre-pandemic levels. Some analysts are questioning whether the recovery can continue at the same pace, or if June will mark a peak in labor growth—especially as new coronavirus cases explode in pockets of the country. Here are a few considerations for investors:

  • What losses are permanent and what are passing? The number of people reporting permanent job losses rose by more than half a million in June.2 If temporary job losses become permanent, it could be a sign of longer-term stagnation for the economy, meaning additional headwinds for the stock market as well.
  • Will we face another round of lockdowns? While employment in leisure and hospitality saw a significant increase last month, this sector is one of the most vulnerable to losses as restaurants and hotels are faced with back peddling or stalling reopening plans. Other areas like manufacturing, construction, and healthcare, which also saw strong job growth last month, may be less susceptible to another round of social distancing measures. 
  • Are we setting ourselves up for disappointment? The past two jobs reports have at least temporarily juiced the stock market by surprising investors to the upside—but the same thing can happen on the flip: If analysts become overly optimistic in their forecasts, the market may be disappointed. Either way, the price moves tend to be a short-term phenomenon and shouldn’t influence investor behavior.

It is certainly encouraging to see the labor situation improving, but the overall picture is still very much up in the air. While no one can anticipate the course of the virus or how it will affect the economic recovery, investors can best position themselves by keeping decisions—and portfolios—focused on individual timelines, long-term goals, and risk tolerance.

  1. Reuters, “U.S. job growth roars back, but COVID-19 resurgence threatens recovery,” 7/2/20, https://www.reuters.com/article/us-usa-economy/u-s-job-growth-roars-back-but-covid-19-resurgence-threatens-recovery-idUSKBN2430FF
  2. US Bureau of Labor Statistics, “The Employment Situation, June 2020,” 7/2/20, https://www.bls.gov/news.release/empsit.nr0.htm
  3. The Washington Post, “The U.S. economy added 4.8 million jobs in June, but fierce new headwinds have emerged,” 7/2/20, https://www.washingtonpost.com/business/2020/07/02/june-2020-jobs-report/?arc404=true&utm_source=morning_brew

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