The May payroll report provided the first indication of the labor market starting to recover from the losses in March and April. In our post at the time, we laid out some ways to track the progress of the labor market. This week, we are updating how those data points have been trending and what this could mean going forward.
One measure we mentioned is the mix of permanent versus temporary workers. In May, 73% of the people categorized as unemployed were considered temporary. That dropped to 56% in July. This is mostly a function of workers returning to their positions at companies that were temporarily impacted by the shutdown (mainly in retail trade and hospitality). The percentage of workers considered not temporarily unemployed increased from 14% in May to 22% in July.
This trend lines up with what we are seeing in the duration of unemployment. The group that has been unemployed for 5-14 weeks declined in July (mostly people returning to work at places that were temporarily closed or scaled back), while the group that has been unemployed longer than 15-26 weeks continues to increase.
Tracking the labor force participation rate (active labor market divided by the total population) helps gauge the confidence workers have to find a new position (unemployed workers not actively looking for a position are not considered part of the labor force). In May, the participation rate was 60.8%, which was near the lowest level since 1973. In July, the labor force participation rate was 61.4%, a slight decline from the June level. While this is an improvement from the lows in April, the overall level is very weak and highlights the amount of progress that still needs to be made. If companies start to rebuild their employment base, 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.
Initial and continuing jobless claims are released on a weekly basis (continuing claims is a week behind initial). These data sets help us track whether companies are still reducing payrolls and whether an increasing number of workers remain on some type of unemployment program. This can be captured by combining the state unemployment data with the expanded Pandemic Unemployment Assistance, which is a new program aimed at covering individuals that are not typically covered by traditional plans (self-employed, contractors, freelances, etc.).
The most recent initial claims release came in at 1.1 million, down from 1.4 million, and at the lowest level since March 14th when many of the lockdown policies went into effect. This is a positive trajectory but is still a very high level (with the highest being 670K in 2008-2009) and is likely suggesting real economic weakness as we are several months past the most restrictive lockdown measures. The group covered under the Pandemic Unemployment Assistance program also declined, suggesting many of these members are returning to their prior activities.
Based on state data, continuing claims has declined from a peak of 24 million to 16.1 million. Again, this is a positive trend, but is a much higher number than normal (the peak in 2009 was 6.87 million). Progress has also started to stall following the initial large decline in mid-May. The four-week average in mid-May was an increase of 707K, improving to a decline of 1.1 million by early June, and has since slowed to an improvement of 413K.
This data would suggest that the labor market is continuing to improve, but the pace is slowing, as most of the early gains from the reopening have been realized.
The Bureau of Labor Statistics publishes the monthly Job Openings and Labor Turnover report which tracks the number of openings, hires, separations, and resignations. If companies are actively looking to bring workers back, then hires should increase along with openings as companies look to attract people beyond just their returning workers. This data is released on a lag, and the most recent release is through June.
The number of hires has improved from a low of 4 million in August to 6.7 million in June. The June number declined from 7.2 million in May, but those are the two highest numbers in the history of the data series (back to 2001).
The number of openings has increased from a low of just under 5 million in April to 5.9 million in June. This is a positive development, but still the lowest number of openings since May 2017 when there were far fewer unemployed.
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. These policies create a challenge for measuring the true state of the labor market and the potential economic contribution from consumers. Monitoring these labor market developments will help better determine the extent of the long-term impact to the consumer and the pace of the recovery.
Rank Dawson, CFA
Vice President, Research and 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.