The labor market has been dramatically impacted by the measures taken to control the spread of COVID-19. There are a few ways to measure the labor market beyond the unemployment rate that can be used to track the overall trends in activity.
One measure is looking at the mix of permanent versus temporary unemployment. Typically, temporary unemployment is a small portion of the overall unemployment population, as furloughs and temporary work stoppages are rare. The current environment is different due to the forced shutdown of certain businesses and activities. In the May payroll report, 73% of the people categorized as unemployed were considered temporary. Historically, that percentage is under 20%. The percentage of temporary unemployed should decline with the overall unemployment rate as businesses start to reopen. Monitoring the mix of temporary versus permanent unemployment along with the overall unemployment rate should help illustrate how many jobs were lost for economic reasons.
One way to measure labor demand is the number of workers participating in the labor market. If someone is currently employed or actively looking for employment, they are considered part of the labor force. If they are retired or unemployed but not actively looking for a new position, they are not considered part of the labor force. In the May payroll report, the labor force participation rate (active labor market divided by the total population) was 60.8%. This was a slight improvement from April but was otherwise the lowest level since 1973. As the unemployment rate improves, the labor force participation rate should increase. If this does not happen, it is a sign that either workers are not confident in their ability to find new employment or they have decided to retire.
Each week the number of new and continuing unemployment claims is released. This data can be used to determine the pace at which companies are still cutting payrolls or bringing back unemployed workers. The June 18th release stated that the number of initial claims was 1.5 million. While this number has been declining for several weeks since peaking at 6.87 million at the end of March, it is still more than double the highest week experienced during the 2008-2009 period. The above average initial claims number is made all the more surprising by the fact that the most recent continuing unemployment claims report showed 20.5 million workers are still filling for unemployment insurance. While this is also down from a record peak of 24 million (likely due to workers returning to businesses that were temporarily closed), it is still well above the high of 6.5 million reached during the 2008-2009 period.
Job openings is one way to measure the need for additional workers. The Bureau of Labor Statistics publishes a monthly Job Openings and Labor Turnover report. In the most recent April report, the number of job openings declined by 965,000 to just over 5 million. This was the lowest total number of openings since December 2014 and the largest monthly decline in the history of the data set (January 2001 start date). If companies start to recover and business activity picks up, the number of job openings should increase along with the number of hires.
There have been several government policies put in place since the start of the financial market turmoil in February and the COVID-19 related shutdown. Many of these policies are aimed at offsetting lost consumer and business income and helping businesses avoid permanent job losses. In the near term, it is difficult to determine the permanent versus temporary impacts to the labor market and the consumer. Monitoring the trajectory of the above-mentioned labor market indicators can help determine the pace and degree to which companies are recovering.
Rank Dawson, CFA
Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.