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The pandemic impact on employment

| November 13, 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.

The economy has made a remarkable comeback after the spring Covid lockdowns as GDP has surged and key indicators of spending like retail sales and core capital goods orders and shipments have exceeded pre-pandemic levels. The labor market has also rebounded faster than most economists anticipated in the spring but nevertheless has lagged the bounce in GDP and spending. Payrolls have reversed just over half of the March-April losses. A breakdown by sector shows the lag in jobs is, not surprisingly, correlated with how directly the pandemic has affected each industry.

Defining categories

It seems useful to separate the economy into three categories, starting with industries that are not suffering from ongoing direct pandemic effects. These industries may still be well below pre-pandemic employment levels due to soft demand or other factors unrelated to the pandemic, but there is nothing about the virus that is directly depressing the sector. Mining is one example. There is no question that oil prices fell sharply due to the Covid lockdowns, which in turn curtailed domestic drilling, so mining employment has remain depressed and in fact is lower now than in April, but these are indirect effects. A number of other industries could make similar claims to a continuing Covid effect, but I want to focus purely on sectors where social distancing and government restrictions are exerting an ongoing and direct drag on activity. This category will include most sectors.

The second category includes industries where the virus is having an ongoing impact, but businesses have found a way to substantially resume operations. The clearest example here would be restaurants, where firms have resumed operations as best they can but are being directly restricted from going further by the virus. I have also included education in this group, as schools are partially reopened around the country but far from back to normal. Other categories that belong here include the TV and motion picture industry, which appears to have just returned to action over the last month or two, temp agencies, services to buildings and dwellings, which includes janitors and security for office buildings, social assistance, which includes day care centers, and “other services,” which includes personal services like hair and nail salons.

The final category includes industries still substantially depressed as a direct result of the pandemic. Air travel, transit, arts, entertainment, and recreation, which includes spectator events, amusement parks, and casinos, and hotels all belong here. One might make a case for any number of industries to be included here, but the dividing lines between categories are entirely subjective and not entirely obvious.

Payroll swings by category

Category I included almost 89 million workers in February, lost about 6.5 million jobs during the lockdowns, and has since restored about 3.5 million jobs.

Except for the TV and movie industry and education sectors, the degree of recovery in Category II industries has been remarkably similar, in the 60% to 70% range, with retail trade doing somewhat better (Exhibit 1).

Exhibit 1: Employment in “Category 2” Industries

Source: BLS.

The air travel industry continues to shed jobs, while the other three industries in Category III have regained about one third of the jobs lost during the lockdowns (Exhibit 2).

Exhibit 2: Employment in “Category 3” Industries

Source: BLS.

Digging out of a hole

Perhaps counterintuitively, the Category II sectors have recovered a higher percentage of the jobs lost during the lockdowns, 59%, than the Category I sectors, which have only restored 53% of the jobs lost in March and April. However, this puzzle can be easily explained. The Category I sectors only shed about 7.5% of their February payrolls in March and April, while the Category II sectors dropped three times that percentage and Category III industries’ payrolls fell by nearly half.

What these numbers suggest is that there are really two broad forces that can help to restore employment back to pre-pandemic levels. For Category I, the three million jobs drop from February to October is mainly explained by a lower level of activity broadly. The example of the mining industry is illuminating. Oil prices bounced noticeably when the Pfizer/BioNTech vaccine news hit on November 9. As the economy is able to return to health, which of course is dependent on the course of the virus, one might expect, all else equal, oil prices to rise and thus drilling activity to revive. As the level of economic activity lifts, the Category I jobs should gradually be restored. Individual sectors may be stronger, such as warehouse and delivery for online retail, while others may be permanently weakened from the pre-Covid state of the world, such as commercial construction, but the broad level of activity and in turn employment should recover.

For many of the sectors in Categories II and III, however, the recovery may be more non-linear. There will come a day when social distancing restrictions will be mostly lifted, and I would expect activity in the affected sectors to respond accordingly. Restaurants will, at some point, be allowed to return to full capacity indoor dining. Day care centers and schools will eventually return to normal operation, perhaps at the beginning of the 2021-22 academic year. Travel will resume, though it may look different than before.

Quantifying the remaining ground to make up

Overall, payrolls dropped by over 22 million in March and April and have since recovered 12 million. That leaves the U.S. economy still in a 10 million job hole. It is interesting to focus on where those jobs are. Three million of them are in Category I, including 600,000 manufacturing jobs, 300,000 construction jobs, and over a million professional services positions. Meanwhile, Category II sectors are still running more than five million below the February level, with restaurants representing two million of that and education, private and public, accounting for another 1.4 million. The Category III industries, which represent a small portion of overall jobs, still account for over 1.5 million of the jobs still missing relative to February.

Based on this analysis, the most likely scenario is that payrolls continue to gradually rise over the next few months, with the pace of improvement contingent to a degree on the course of the virus, the surge in cases likely impeding job growth in November and December. Unfortunately, monthly increases of 600,000 or 700,000, as we have seen in recent months, while roughly triple a normal rise, will not help to dig out of that 10 million job hole very quickly. However, at some point in 2021, once a vaccine has been widely distributed and the incidence of Covid wanes, we may see a flurry of hiring, as social distancing restrictions are relaxed and schools, restaurants, and other businesses can return to more normal operations.

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