Non-Farm Payrolls reports released on last Friday showed that US basic labor market metrics have deteriorated, albeit at a slower pace than expected. Unemployment rose to 14.7% (vs. 16.0% forecast), jobs count suffered steep contraction by 20.5 million (vs. 22 million forecast). It would seem that the less downbeat report prompts us to revise devastating impact of lockdowns and the outlook for labor market recovery in May and somewhat weakens skepticism about the S&P500 rally, however details of the report show that this conclusion may be premature.
Firstly, recall that the BLS defines unemployed as a person who lost his job but is in active search for it. The part “is in active search for it” basically forms an additional filter because there is also a part of the unemployed who are demotivated to look for a job and it is reasonable not to count them as unemployed when the labor market is in good shape, because they deemed to be demotivated for reasons that economists do not particularly care about (sufficient income, health problems, etc.). It is assumed that they do not reflect/impact labor market conditions. But it is natural that during a downturn, an increase in the number of demotivated workers most likely indicates an increase in the number of “desperate” unemployed (want to a job but gave up looking for it), which should be effectively counted as unemployed because their status does reflect worsening labor market conditions. That is, there are also unemployed “outside the workforce”, which the basic unemployment rate (the headline 14.7%) doesn’t capture, but which are important to count. Looking at the collapsed level of labor force participation, we can conclude that the number of these desperate workers has increased:
Since February, 8.1 million people have moved out of the labor force and based on the analysis above, there are likely to be many “true” unemployed people in that category. Headline figures (14.7%) doesn’t count that.
Secondly, the importance of secondary indicators of employment, such as “employed, but absent from work for other reasons”, “involuntary part-time employment” unexpectedly increased. These indicators increased to 7.5 million and 6.6 million respectively. In my view, the fact that the BLS couldn’t count the gain in the first indicator as the gain of unemployed is pure formality, although it saw sharp increase during the lockdown period so it’s not hard to guess which were those “other reasons”.
So, let’s update our calculation of unemployment: 23.1 (basic BLS figure) + 8.1 + 7.5 + 6.6 = 45.5 million. Dividing this value by labor force (164.5 million) we get unemployment at 27.5%, that is, almost twice as high as the official indicator at 14.7% and higher than broad U-6 indicator (which include demotivated workers) which rose to 22.5% in April.
The April report did not have high hopes in terms of the ability to move the market, which, in fact, could be inferred from the calm market response to huge gains in the initial unemployment claims. However, with the country’s exit from the lockdown, the situation may change. In addition to the initial unemployment claims, continuing claims also come to the fore, which will be direct measure of recovery of employment. Much attention should be paid to negative surprises in continuing claims, as they will likely indicate permanently lost jobs, i.e. long-term negative effects of lockdown on the US economy which is of course not priced in the current S&P 500 rally.
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на экономику США.