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Thursday, July 02, 2020

June Employment Report Quick Take

In most respects, no surprises, but an uncommon amount of certainty!

Household and Enterprise Surveys agree for once. It is a miracle. 
+4.9 million Household,
+4.8 million Establishment. 

Consequently we can be quite confident about using the numbers in the establishment survey. 

Of course big gains in manufacturing/goods production, with the auto restart. Over May and June we have now regained about half the jobs lost in April. The mining and logging component, mostly oil/gas, is still losing jobs as expected. 

Services is more difficult. The two-month gain is only about a third of the jobs lost in April. Retail was a big gainer this month with almost 740K jobs added. 

Medical is going to be one wild card. The Healthcare & Social Assistance category had lost about 2.13 million jobs in April. Over May/June the sector has regained about 40% of those jobs, with 475K being added in June. 

Most of the medical jobs were lost due to people not being either able to access more routine care or being willing to access routine care. The ability to access the care is sharply improved in most areas, but the willingness may be lagging. This is likely to be a slow recovery sector. 

Leisure and Hospitality had dumped nearly 7.6 million jobs in April, and so far has regained nearly 3.5 million jobs, with 2.09 of those this month. 

There should be a little more improvement next month in these categories, but it is hard to tell how much. Some states are still in the re-opening stages, albeit a little more slowly on average. The sharp increases in new CV cases and now the increasing wave of hospitalizations has changed things for some populous states. Texas, Florida and California are back-pedaling a bit and plans for scheduled reopening of various establishments in some other states have been paused or rolled back a bit in states not seeing the large uptick. 

TX, FL and CA are such a huge share of the national economy that it's a bit daunting; changes there are certainly going to show up in national stats. 

The above are surveys based on sampling, although the strong correspondence between two different surveys should raise confidence in the results. 

For another take on the matter, here is an update on Withheld Income and Employment Taxes as reported in Daily Treasury Receipts, shown as year-over-year change:

Smaller businesses are the slowest to send in payroll taxes, so recent upticks in small business won't be picked up. We'll see more of that in a few weeks. 

Part of the fall off in June in payroll tax receipts is related to school closings; the losses in private employment were much higher. 

Regardless, the income effects of the downturn are not totally captured by counting jobs. Shorter hours and wage cuts are leading to lower paychecks for many. From the Household Survey, about 4,700 more workers were unwillingly part-time in the survey week compared to June of 2019. 

If you look at the four-week average in the graph above for June 22nd, the actual number was -11.1%. The official unemployment rate for June was 11.1%. Treasury receipts are of course delayed by weeks from workers on payroll in the survey week, but I have previously found that there is a good correspondence between those numbers. I'm not sure if that relationship still holds as well given the massive economic disruption we are seeing. 

When workers are laid off, especially at the higher levels, they usually get severance checks and the withheld taxes on those severance checks produce a temporary boost in payroll tax receipts. 

With that caveat, the trend I am seeing in the treasury receipts is forecasting a bad summer with a slowing economy. Congress had better extend the temporary employment programs pronto. 

When you have a pandemic, you have changes in the attitudes of business operators, workers, and customers. Those attitude changes do not suddenly snap back when the lockdown ends, so the spending behavior (70% of the economy) is not restored fully. At best one gets a W shape recovery. If second lockdowns or lockdown pauses are widely necessary then it will be a lazy W recovery.
Agreed - and since the pandemic issues are real, there is no rational argument for businesses or consumers to suddenly start wildly spending. Instead the rational behavior is to seek a solid position to ride out the storm.

Congress is going to have to pass programs that involve longer support so that consumers don't pull back spending a lot more. And businesses need some domestic impetus as well. We are on the cusp of a second Great Depression.

The Fed has succeeded in inflating a stock bubble, but without improvement in the underlying economy, that's going to be a repeat of 1929. Older business owners will not go into hock for ten years to try to continue their businesses - they can't afford to do that. Instead many will shut them down.

I doubt bars, restaurants and resorts can stay afloat under the measures dictated. Maybe 1 or 2 in 10?

We have to find a place on Main Street for the money to go where it can be used. Rail data sucks, to be honest.
We turned ourselves into a service economy; unfortunately the bottom half of that service economy is horribly vulnerable to a pandemic. I've seen estimates of a minimum of 75% losses in bars & restaurants. Airlines will have to be propped up for at least 3 years since we have no other effective long-distance transit in the US. Cruises are history.

The Fed has protected the monied interests and neglected Main Street; that will not end well. Congress managed two pandemic bills before it seized up with politics; I hope we'll get a third bill, but hope is not a plan. We badly need an overhaul of unemployment insurance to extend it to cover small business and the gig economy. A functional political system would do that. It is a sign of how dysfunctional our politics are that the obvious issues can't be addressed. That means hope of some sort of Main Street support plan is a mirage.
If you want a real cheering thought, imagine the situation if you're Germany or China. Your economy is heavily dependent on export and your best customer just quit buying anything but masks. What's your recovery plan??
WSJ - I assume that Germany's plan is to sell stuff to Greece and Italy. Also to pay people to buy BEVs.

Yes, we will watch their economy cartwheel into the abyss. Worst mistake ever to let their auto industry (where they could still compete) be run over by the greenies.
As for your comments re our domestic economy, they are extremely to the point. Services will be struck hard. My view is that the pandemic both exposes critical weaknesses (drug supply, essential medical supplies) in our production as well as critical weaknesses in deindustrialization theories.

It is pretty clear that only re-industrializing can really bring the economy back.
The open question is how much permanent restructuring of the economy happens. For instance, the business model for various professional work (engineers, programmers, marketing people, financial people, etc.) has been to gather them daily to work in an urban office. At lunch and in the evening they go out, eat, shop, then return to their distant homes.

Well, we've just had three months of them not doing that, with how many more to follow? How much of a productivity hit from work from home? How many costs can you cut if you just ... never bring them into a central office? Will the reduced costs make up for the productivity hit? If it becomes the new normal, how much collateral damage to food service, retail, and other businesses in the core districts?

Add a few protests and riots on top of that to encourage consideration of other potential business disruptions. I'm pretty sure core districts are not going to do well in the recovery to come.
I am so glad to see you back blogging! I don't agree with everything you say, but love the deep insight and your distinct tone. Welcome back!
Further thought on a global basis: East Asia pulled 400+ million out of poverty by making things for the American market. If the Americans reindustrialize and close their market, how much of East Asia's gains can be held onto?
Welcome back!

Just thought I’d share my personal anecdotal not-so-cheery data for this thread.

The good news is that I’m actually buying a lot more stuff from Costco, Amazon, Target, Chewy, and Walmart lately. Also bought a new bicycle that, due to incredible pandemic demand, won’t actually be shipped to me until August.

The bad news is that I’ve done this before. I had the same behavior heading into the Great Recession. My “apocalypse pantry” is mostly restocked. Only this time, I’m not the only person who sees value in having extra toilet paper on hand. (And for the record, I had more than plenty heading into this pandemic.)

Some might be excited that I bought a bicycle and point to it as a sign of economic strength. However, the bicycle might actually replace my next car. At the very least, it will make my current car last longer. The grocery store is 3 miles from my house. I do not plan to drive my car to the grocery store nearly as often.

Here’s another purchase I made recently. I bought 3 pairs of comfortable flip-flops to replace the 1 pair I often wear. I won’t need to buy more flip-flops for a very, very long time. Behold the power of negative real interest rates on the 30-year inflation-protected treasury bond.

The Fed has once again pulled forward my demand. Going forward, my overall demand will therefore be lower than it would have been.

It’s anecdotal. Better hope there aren’t a lot of other people like me.
I should add that the flip-flops are just one example. Further, I don’t even need to replace my flip-flops right now. I just know I will someday, so might just as well do it now.

This service economy better not be counting on me to help it much. Here’s another purchase that does not bode well: barber scissors. Out of necessity, my girlfriend has been cutting my hair. She’s been doing great and she’s offered to keep doing it even if/when the pandemic is over. We already had clippers and trimmers. She requested better scissors. Request granted, obviously.

The downside is that I can’t help feeling guilty. The business (and its employees) in the strip mall who once cut my hair, is no doubt feeling enormous economic pain right now. Sigh.
Mark - nice to hear from you!

As WSJ points out, behavior is going to change. The longer this drags on, the more behavioral patterns will change. The longer the shift, the more likely it is to become a new habit.

Your haircuts are probably not unique; I would imagine that buying patterns will be altered for years by those at most risk.

And then of course there is the problem of having less money... That too forces changes.

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