January 2021’s Jobs Report, out on Friday, did little to dissuade us from the idea that markets will largely ignore these updates through Q1 of this year. The parts of the US labor market hardest hit by the pandemic – leisure, hospitality and retail – remain under pressure. This will not change in any meaningful way until wide vaccine rollouts allow local policymakers to permanently remove business restrictions. We should start to see that occur by mid-year.
We do, however, need to be mindful of what permanent damage to the domestic labor market may be underway. Three thoughts on this:
#1: Labor force participation for working-aged (25 – 54 years old) Americans. As the following chart shows, LFP rose from 1948 to 1999 thanks to a rising tide of women in the workforce. Overall US working-aged LFP peaked in January 1999 at 84.6 percent, but then dropped by 2 full points (or 2.4 million people) through 2005. Despite a modest increase late in the early-2000s economic cycle, it never really caught any traction during this expansion.
The Great Recession did even more damage to working-aged LFP, and by mid-2016 it was down to just below 81 percent. Only from 2016 – 2020 did participation have something of a renaissance, rising to 83 percent in January 2020. When you add in the fact that unemployment was running at 3.5 percent – the lowest joblessness since the Vietnam War skewed the data in the late 1960s – this was clearly a very, very strong labor market.
Takeaway: we know from the last 2 economic downturns that working-aged labor force participation can take a lasting, multiyear hit after a recession. Every point of this cohort’s LFP is 1.2 million potential wage-earners and therefore taxpayers and potentially more affluent consumers. Also, from the perspective of investor confidence, it’s hard not to see that LFP peak in 1999 and ponder what role it might have played in that market’s “best of all possible worlds” perspective. Or, we would add, what a permanently lower LFP might do to equity valuations as we come out the other side of the Pandemic Recession.
#2: Long-term (+27 week) unemployment. As of January 2021, 37 percent of all unemployed Americans have been without a job for 27 weeks or longer. The chart below shows the trends for both the total number of unemployed Americans back to 1970 as well as the portion that had been jobless for the prior 27 weeks. The peak long term/total unemployed ratios for each cycle were:
- Early 1970s: 13.6 percent, April 1972
- Mid 1970s: 20.1 percent, January 1976
- Early 1980s: 24.7 percent, May 1983
- Early 1990s: 21.6 percent, September 1992
- Early 2000s: 23.4 percent, November 2003
- Early 2010s: 45.8 percent, June 2010
Takeaway (1): there is a multi-decade trend of long-term joblessness being an ever-larger problem after a recession. We would ascribe that primarily to the rising role of technology in more and more job categories, where being out of the workforce for over half a year creates a perceived skills gap.
Takeaway (2): this skills gap should not be a problem if the US economy recovers meaningfully in the next 6 months but could become an issue if it takes longer. This is much the same message as our prior point and neatly explains why Treasury Secretary Yellen, a labor economist, is pushing for the largest fiscal stimulus package Congress can pass.
#3: While the Bureau of Labor Statistics’ most complete measure of US unemployment did show improvement in January 2021, the cadence of future gains will tell us a lot about the labor market’s true state. We use U-6 unemployment, which includes workers who have a part time job but want full time employment as well as those who have not been looking for a job recently but still want a position. Think of it as a “real feel” temperature reading for the US labor market.
Here is that data back to 1994 (earliest available):
Takeaway: U-6 unemployment is today right where it was in January 2015 (11.1 – 11.2 percent), which was 4 years after its post-Great Recession peak. It would take another 5 years to get to the January 2020 lows shown in the chart. We certainly do not have that sort of runway this time around if the US economy is going to set up for a strong 2021.
Summing up all 3 points: while markets may be rightly ignoring the Jobs Reports now and for the next few months, history says we can’t be as complacent about the potential damage to US labor markets caused by the pandemic. The speed of the recovery will profoundly inform economic growth from 2022 – 2025 which, we would note, encompass both mid-term Congressional elections as well as the next Presidential race. And everyone in DC is keenly aware of that fact…