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The trajectory of the labor market
admin | July 31, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Monthly US employment figures posted a combined 7.5 million rebound through May and June, far stronger than most economists would have imagined a few months before. With the summer surge in the virus, there are fears that the economy and net hiring faltered in July. Rising initial unemployment claims in the second half of July have substantially added to that impression. However, the recent backup in initial claims appears to mainly reflect a seasonal adjustment that does not accurately track the unique underlying economic situation this year.
A summer stall in the labor market?
The resurgence of Covid in June and July led to a flattening out of a number of high-frequency economic indicators, especially those related to sectors most sensitive to the restrictions imposed by government lockdowns. With bars being re-closed and indoor dining being scaled back, foot traffic at those venues has stalled. Likewise, after rapid growth in May and June, private sources of labor market information, such as HomeBase and Kronos, showed a significant slowdown in the pace of gains in employees working in July.
In this context, market participants are especially sensitive to any negative news on the economy and the labor market. That news came through in late July. After falling for months, the number of seasonally adjusted initial unemployment claims increased in the week ended July 18 and again in the period ended July 25 (Exhibit 1). Some in the market took these moves as a signal that the demand for workers is petering out.
Exhibit 1: Seasonally adjusted initial unemployment claims
Source: Labor Department, Amherst Pierpont Securities
An illusion?
The recent moves shown appear to reflect a powerful seasonal adjustment more than a substantial rise in actual layoffs. As the non-seasonally adjusted numbers show, initial claims did flatten out in late June and early July, more in line with the timing of when a number of southern states were forced to scale back their reopenings, but actually resumed their downtrend in the last two weeks (Exhibit 2).
Exhibit 2: Non-seasonally adjusted initial unemployment claims
Source: Labor Department, Amherst Pierpont Securities
The divergence between the seasonally adjusted and unadjusted figures in July can be easily explained. In a typical year, a number of factories shut for one or two weeks, often for worker vacations or factory retooling. In this scenario, there is usually a flurry of layoffs, as suppliers and other businesses that are dependent on the factories are forced to temporarily furlough their workers. Once the factories return to full operation in the second half of July, layoffs recede.
The seasonal adjustments for initial claims assume a 14% increase in the number of new filers over the first two weeks of July and a 27% drop in the back half of the month. Of course, in 2020, most of the manufacturing sector was shuttered for a month or longer during the lockdowns, including the most prominent industry to feature the summer shutdowns, the automakers. As a result, there was no need for the plants to be closed again, no flurry of seasonal layoffs in early July, and no corresponding dive in the number of new filers later in the month.
While there may be other seasonal forces that remain in place, the largest driver of the big swings in the seasonal factors for initial claims was probably not applicable, and the factors themselves were arguably inappropriate.
While the degree of improvement in the labor market inarguably slowed in July from June, the unadjusted numbers offer a more accurate picture of the evolution of the labor market over the past month or two. The point here is not to argue that net hiring remains as robust as it was in May and early June. It clearly is not. However, the “Oh dear, initial claims are backing up. The economy is falling apart!” narrative that has been so prominent in the media and among less informed market participants—even some economists who failed to do their homework—over the past week or so is, at a minimum, overwrought, and potentially entirely misguided.
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