Even though Friday’s Jobs Report printed the lowest unemployment rate since the start of the pandemic, at 5.8 percent, it was broadly disappointing. Job growth was only 599,000 positions versus expectations of 671,000 and a whisper number of closer to 1 million because of ADP’s +978,000 estimate released the day before/
We’ve been leveraging the US state- and city-level unemployment data to support our view that US job growth would be lackluster, so this report obviously fits with that perspective. We’ll be back with the latest granular data once it is out, but the US labor market narrative is clear:
- Pockets of high unemployment in densely populated cities (NYC and LA, for example) remain, and will do so for at least several more months.
- This is something Federal Reserve rate policy cannot directly address.
- Rather, it requires America’s major urban areas to entirely reopen. There are other issues, such as workers’ health concerns, childcare constraints, and unemployment insurance disincentives, to consider but the geographic concentration of joblessness is the one we think even the Federal misses in its analysis.
Pulling back the lens to refocus on Friday’s data, here’s what caught our eye:
#1: We’re still missing 7.6 million jobs from February 2020. This gap to pre-pandemic employment is the one Fed Chair Powell mentioned several times in his last post-FOMC press conference. We expect to hear it again next week. The background data:
- Peak US pre-pandemic employment was 152,523,000 in February 2020.
- We are at 144,894,00 employed workers as of Friday’s report. The difference to Feb 2020 is 7,629,000.
- Average month job growth in 2021 has been 478,200. March 2021 was the best month, at 785,000.
Takeaway: We are now well into the US economic reopening, so the chances of a big (+1 million jobs added) month are declining. Our baseline assumption is that the YTD average of 478,000 jobs/month is a reasonable run rate to expect going forward.
#2: Labor force participation (LFP, workers + unemployed divided by working aged population) is not recovering. As the chart below shows, the current reading of 61.6 percent is 1.8 points below the January 2020 peak of 63.4 percent. Moreover, the most recent readout is scarcely higher than 11 months ago (June 2020 of 61.4 percent).
This pre-/post-pandemic participation gap is responsible for 3.0 million of the 7.6 million fewer employed workers we highlighted in the prior point, or 39 percent of that total. The relatively flatness of the LFP line above shows this is become a structural, rather than cyclical, phenomenon. If you’re looking for a single issue upon which the Federal Reserve will hang its low rates for longer “hat”, this is it. Chair Powell (and Secretary Yellen, for that matter) are convinced that a red-hot economy delivers higher LFP over time. They point to the immediate pre-pandemic experience (2016 – 2020), when LFP rose by a full point, as proof of that.
Takeaway: expect flat-lining US labor force participation to have pride of place in Chair Powell’s comments during his press conference next week. This is distinct from the old Federal Reserve approach to “full employment”, which hinged on unemployment rates.
#3: As far as which sectors represent the lion’s share of the current 7.6 million missing jobs versus February 2020, these four make up 70 percent of the gap:
- Leisure and Hospitality: 2.5 million workers than 2020 (33 percent)
- Government: 1.2 million fewer (16 pct)
- Education and Health Services: 1.1 million fewer (14 pct)
- Professional and Business Services: 0.7 million fewer (9 pct)
Now, one can certainly tell a story about how each of these categories will rehire additional workers in the coming months. Further reopening will help leisure/hospitality. Federal aid to states should boost local government job rolls. Returning to a more normal economy will be helpful to both education/health and professional/business services.
Takeaway: while further US labor market recovery is all but certain, the industries that still need to make up the most ground relative to pre-pandemic employment levels point to only a slow pace of improvement going forward. We still need international tourism to come back, for example, before leisure and hospitality can fully recover, and state/local governments won’t just put out a million “help wanted” notices over the next 3-6 months.
Summing up: in our opinion, Friday’s Jobs Report is an accurate reflection of US labor market reality. There are structural forces at play, and these will not be easily or quickly fixed by low interest rates or even infrastructure spending. On the bright side, such as it is, policymakers will see the employment gap to February 2020 as their primary challenge for the rest of the year and into 2022. That means easy monetary policy and a continuing drumbeat for more fiscal support. All of which helps stock prices.