US: Job gains continue, but it’s a long road to full recovery

US non-farm payrolls rose 1.37mn in August, almost exactly in line with the 1.35mn consensus with the unemployment rate falling to 8.4% from 10.2% (consensus was 9.8%).

Despite the strong headline reading the details show that private sector employment gains were softer than the market had hoped at 1.027mn versus 1.3mn forecast with temporary government hiring for the 2020 Census making up the residual (Federal government employment rose 251k).

In the private sector, services saw most of the gains with leisure/hospitality up 174k, trade and transport rising 341k, retail up 249k and business services up 197k. Manufacturing (+29k) and construction (+16k) saw more muted gains.

“Officially” unemployment is now 13.55mn, but this likely understates the degree of joblessness. That’s because to be “officially” unemployed you must be actively looking for work and because you don’t need to be looking to claim unemployment benefits, many people choose not to. Yesterday’s jobless claims data showed 29.22 million people are claiming unemployment benefits under all schemes and while there is a debate over this figure too, the “true” situation is likely to be somewhere in the middle.

Consequently, it is probably better to look at employment as a percentage of working age population to give us the clearest picture of the US labour market – see chart below. It is at 56.6%, which is where we were back in the mid-1960s when female participation was far lower than it is today.

Wage growth is at 4.7% year-on-year, but this figure is distorted by the fact that most of the jobs lost since February have been concentrated in low paying sectors. This means that the dollar wage of those in work is going to be “on average” much higher in August 2020 than in August 2019. There is very little evidence of actual wage growth outside of sectors such as grocery and given the slack in the labour, market wage inflation pressures will remain muted for a considerable period of time.

Phase one of the recovery certainly went better than we could have hoped as the economy re-opened and a combination of pent up demand and generous unemployment support programs fueled growth. However, the current environment of weak consumer confidence, employment still being 11.6mn less than February, the hit to incomes from the cut in unemployment payments and the absence of a broader fiscal support package means there are major challenges for the economy as it tries to recoup all its lost output.

High frequency daily data from payroll tracking firm Homebase (see chart below) suggests the pace of jobs gains has slowed sharply in recent weeks while the ISM employment indices both remain in contraction territory. This week’s Federal Reserve Beige Book also warned that “some districts reported slowing jobs growth and increased hiring volatility, particularly in service industries with rising instances of furloughed workers being laid off permanently as demand remained soft”.

How the back-to-school process proceeds will also be important for the next couple of months of jobs data. If people are unwilling to send children to in-person lessons or schools are not physically open then many parents may have to stay off work to provide childcare, thereby limiting potential job gains.

We see a plateauing in the jobs market

Consequently, we see a plateauing in the jobs market with the risk that faced with tough seasonal adjustment factors, we could see a negative payrolls number at some point, underlining the case for additional fiscal stimulus and the need for good news on a Covid vaccine. This levelling off at lower levels than in March can also be seen in credit and debit card transactions, hotel occupancy rates, TSA security check numbers and restaurant bookings, which only re-affirms our view that this recovery will not be V-shaped.