At the end of June, we laid out some ways to monitor how the labor market was trending, and we provided an update in August. There was helpful information in the September payroll report that points to the uphill battle the labor market is facing.
We have been continually watching the mix of temporary versus permanent job losses to identify which workers are being prevented from working and which ones no longer have a position. In May, the percentage of workers listed as temporarily laid off peaked at 73% and has since declined to 37%. At the same time, the percentage of workers listed as not on temporary layoff has increased from 14% to 36%.
Looking at unemployment by duration shows the trend towards permanent job loss and a longer recovery time. The number of people unemployed less than five weeks peaked in April and has since been declining (September was slightly higher as initial jobless claims have increased).
Source: FRED.
The number of people unemployed five to fourteen weeks peaked in May and has since been declining, as many people who were temporarily unemployed have since returned to work.
Source: FRED.
The number of people unemployed 15-26 weeks and 15+ weeks had been increasing but declined in September. On the surface this looks like a positive, assuming they have returned to work. However, one concern with this decline is that people may be getting discouraged and dropping out of the labor force. If this happens, they will no longer be considered unemployed.
Source: FRED.
Source: FRED.
In the September labor report, the labor force participation rate and employment to population rate declined. They are both at levels last seen in the 1970s and likely suggests that many workers are currently not seeking employment.
One contributing factor to the lack of recovery in the labor force participation rate could be childcare. The female 25-55-year-old labor force participation rate declined by a large amount in September, as many schools are not fully reopened.
Weekly initial jobless claims were above 800,000 each week in the month of September. That is an improvement from prior months but is still well above the worst part of the 2008-2009 recessions. This is a potential sign that companies are still struggling to return to prior levels of profitability and cash flow and are looking to lower their operating costs.
Source: FRED.
Continuing jobless claims (which counts workers who continue to file for unemployment and is on a two-week lag) declined in September but remains at a very high level of 26.5 million. This continued high level is being driven by a rise in 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, freelancers, etc.). This could also explain why the unemployed 15+ weeks has been declining. Most state unemployment plans only last 26 weeks, and the Pandemic Unemployment Assistance program is set to last through the rest of 2020. If the labor market stays on the current path, the federal government may need to come up with another unemployment program in early 2021.
Source: FRED.
Source: Hedgeye.
Source: Hedgeye.
The growth in payrolls has slowed from +4.8 million in June to +660,000 in September. A majority of the gains continue to come from industries that were most impacted by COVID-19 and policy responses. In September, restaurants, hotels, entertainment, and retail added 200,000, 54,000, 67,000, and 142,000 jobs respectively (70% of the total). These industries still remain 20%-70% below their prior levels of employment, and given the ongoing weakness in their business, they are unlikely to be a continued source of job gains.
We are entering the period of the labor market cycle where longer-term unemployment starts to become an issue and workers will likely need to transition into other industries to find employment, which takes time. Future gains in payrolls are likely going to be skewed towards areas that are actually growing and not areas that are reopening. The pace of this growth should be linked to the pace of the economic and profit recovery.
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.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC