Layoffs back at pre-pandemic levels; fiscal talks stalled - Capital Economics
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Layoffs back at pre-pandemic levels; fiscal talks stalled

US Economics Weekly
Written by Michael Pearce
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The July Job Opening and Labour Turnover Survey (JOLTS) released this week suggests the labour market is in much better health than the downbeat jobless claims figures imply.

The July Job Opening and Labour Turnover Survey (JOLTS) released this week suggests the labour market is in much better health than the downbeat jobless claims figures imply.

The JOLTS report did confirm the sharp slowdown in the pace of payroll growth in July, driven primarily by a big drop-off in the pace of hiring. But the data on separations revealed that the share of workers voluntary quitting their jobs rebounded to 2.1%, from 1.9%, leaving it close to its pre-pandemic level of 2.3%. In contrast, the number of layoffs has fallen dramatically and, at 1.2%, the layoff rate is now back in line with the February level. In contrast, the latest initial jobless claim figures still imply the pace of layoffs was far worse in late-August than during the depths of the financial crisis. (See Chart 1.)

Chart 1: Layoff Rate & Initial Jobless Claims

Source: Refinitiv

The JOLTS data are backed up by detailed data on labour market flows, which show that the number of people moving from employment to unemployment has fallen close to pre-lockdown rates. That implies the claims data are still being inflated by some other factor, presumably expanded eligibility, and/or the more generous benefits on offer. It is perhaps surprising that distortion didn’t narrow much in August, after UI schemes became markedly less generous as the additional $600 in weekly Federal benefits expired. Whatever the explanation, the JOLT survey suggests that we should not put too much weight on the elevated level of claims when judging the health of the labour market.

Fiscal talks still going nowhere

Even if layoffs are lower than feared, we still expect job gains to slow as the pace of rehiring eases further, in part due to the fading boost from fiscal policy. Unfortunately, there were few signs this week of progress towards a new relief package.

The $650bn “skinny” relief bill unveiled by Senate Republicans this week would extend unemployment benefits at $300 a week through the end of the year and provide for another round of Paycheck Protection Program loans. In reality, the plan only adds $300bn to the deficit because it would divert $350bn from previous CARES act spending, mainly from the idle funds sat in the Treasury’s stabilisation account, which had been earmarked to backstop future Fed lending programs. That in theory would reduce the scope for the Fed to lend to households and firms, but that is little concern given its existing lending tools have sat mostly unused. The Fed would still have scope to scale up its existing facilities or repurpose them using the existing capital at some future date if it wished.

The skinny bill predictably failed in the Senate, but the financial chicanery could potentially help bridge the gap in more promising negotiations between the White House and Democrats. The former said they could accept a $1.5trn package, while Democrats are willing to settle for $2.2trn, down from their initial demand of $3trn+. Even though the headline amounts are narrowing, there is still a huge gulf between the two sides on the details and with just a few weeks of legislative time on the calendar before Congress adjourns, there is little prospect of a package being passed this side of the election.


The week ahead

Data Previews

Industrial Production (Aug.) 09.15 Tue. 15th Sep.

Forecasts

Previous

Median

Capital Economics

Industrial Production

+3.0%(-8.3%)

+1.0%

+0.1%(-8.7%)

Manufacturing Output

+3.4%(-7.7%)

+2.4%

+0.8%(-7.5%)

Recovery in production still lagging

A more modest rebound in manufacturing output together with the shutdown of large swathes of oil production for Hurricane Laura means industrial production probably all-but-stagnated last month.

Although goods consumption is now significantly above pre-pandemic levels, production has been lagging behind, with the latest jobs report showing that the recovery in manufacturing hours worked slowed further. That points to a 0.8% rise in manufacturing output last month. (See Chart 2.)

Elsewhere, utilities output appears to have fallen back last month, reflecting more seasonal temperatures, while mining output looks to have dropped by close to 1.5%, driven by a fall in oil and gas extraction. Most of that should be a temporary fall, driven by Hurricane-related shutdowns in the Gulf. The bigger story is that, with oil prices rebounding over recent months, the rig count has begun to edge back up again, setting the stage for a recovery in mining output over the rest of the year.

Chart 2: Mfg. Hours Worked & Output (% m/m)

Source: Refinitiv

Retail Sales (Aug.) 08.30 Wed. 16th Sep.

Forecasts

Previous

Median

Capital Economics

Retail Sales

+1.2%

+1.0%

+1.0%

Core Retail Sales (Less Autos)

+1.9%

+1.2%

+1.2%

Sales growth slowing to a more normal pace

With retail sales back above pre-pandemic levels, there is much less scope now for rapid monthly gains. We expect a 1.0% m/m increase in August.

While the production side of the economy has lagged, retail sales are already above their February level and the control group measure is more than 7% higher. (See Chart 3.) The latter reflects the substitution in demand towards grocery stores, leisure goods and, in particular, online shopping.

Some sectors are have continued to struggle and, following the renewed easing of restrictions as new virus cases have trended lower, there is scope for a stronger rise in spending at bars and restaurants in August. Clothing sales may also continue to catch up. But building materials sales probably continued to ease back after their earlier surge, while most other categories saw more modest gains. Overall, we expect headline sales to have risen by 1.0% m/m, with control group sales rising by 0.5%. That shouldn’t be cause for concern, however, when real consumption is already on course to rebound by 40% annualised in the third quarter.

Chart 3: Retail Sales (Feb ‘20=100)

Source: Refinitiv

NAHB Index/Housing Starts (Sep./Aug.) 10.00/08.30 Wed. 16th/Thu. 17th Sep.

Forecasts

Previous

Consensus

Capital Economics

NAHB Index

78

78

76

Housing Starts (000s, Annualised)

1,483

1,450

1,450

Capacity constraints will soon limit starts

An increase in building permits in July suggests single-family starts returned to their pre-COVID level in August, with a rise to 1 million annualised. (See Chart 4.)

Tight inventory will persuade builders to boost production, but capacity constraints argue against a rapid increase in building. Notwithstanding a recent correction, lumber prices have surged in the past couple of months, and lots will be increasingly hard to find. After reaching a record high in August, we therefore anticipate a small decline in homebuilding confidence to 76 in September.

Multifamily starts have also recovered quickly. However, a gradual rise in rental vacancy rates, and subdued developer confidence, means starts are likely to have dropped back to 450,000 annualised, leaving total housing starts at 1.45m in August.

Chart 4: Single-Family Permits & Starts (000s Ann.)

Source: Census Bureau

Uni. of Michigan Consumer Confidence (Sep.) 10.00 Fri. 18th Sep.

Forecasts

Previous

Consensus

Capital Economics

Headline index

74.1

74.9

76.0

Recovery in confidence to continue

We estimate that the University of Michigan consumer confidence index continued to recover in early September.

The Michigan index exceeded consensus expectations in August, increasing to 74.1, as any drag from the expiry of the enhanced unemployment benefits at the end of July was seemingly offset by the positive impact from the downward trend in new virus cases.

The brief drop in the S&P 500 may have weighed on sentiment in early September but we doubt that will have a major impact. The levelling off in initial jobless claims last week at a still-high 884,000 is also a potential cause for concern, but the 1.4m increase in non-farm payrolls in August suggested that the labour market is still recovering at a solid pace. All things considered, we expect the University of Michigan index to have risen in September to 76.0, from 74.1. That would fit with the continued improvement in the Bloomberg confidence index over the past couple of weeks. (See Chart 5.)

Chart 5: Bloomberg & UoM Confidence Surveys

Sources: Refinitiv, Bloomberg

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 14th

No Significant Data Released

Tue 15th

Empire State Manufacturing Index (Sep)

08.30

+3.7

+4.4

+10.0

Import Prices (Aug)

08.30

+0.7%(-3.3%)

+0.5%

Industrial Production (Aug)

09.15

+3.0%

+1.0%

+0.1%

Capacity Utilisation (Aug)

09.15

70.6%

71.7%

70.7%

Manufacturing Output (Aug)

09.15

+3.4%

+2.4%

+0.8%

Wed 16th

Retail Sales (Aug)

08.30

+1.2%

+1.0%

+1.0%

Core Retail Sales (Aug)

08.30

+1.9%

+1.2%

+1.2%

Control Group Retail Sales (Aug)

08.30

+1.4%

+0.4%

+0.5%

Business Inventories (Jul)

10.00

-1.1%

+0.2%

+0.1%

NAHB Housing Market Index (Sep)

10.00

78

78

76

Fed Policy Announcement (Sep)

14.00

0.00%-0.25%

0.00%-0.25%

0.00%-0.25%

Thu 17th

Housing Starts (Aug)

08.30

1,496,000

1,450,000

1,450,000

Philly Fed Index (Sep)

08.30

+17.2

+15.0

+15.0

Initial Jobless Claims (w/e 12th Sep)

08.30

884,000

875,000

Fri 18th

Current Account (Q2)

08.30

-$104.2bn

-$167.3bn

-169.5bn

Index of Leading Indicators (Aug)

10.00

+1.4%

+1.3%

+1.8%

Uni. of Mich. Consumer Confidence (Sep, Prov)

10.00

74.1

74.9

76.0

Selected future data releases and events

23rd Sep

Markit Manufacturing PMI (Sep, Prov)

09.45

Markit Services PMI (Sep, Prov)

09.45

25th Sep

Durable Goods Orders (Aug, Prov)

08.30

5th November

Fed Policy Announcement

14.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

2020

2021

2022

GDP

-31.7

+30.0

+8.3

+5.0

+4.7

+4.1

(-3.7)

(+4.5)

(+4.0)

CPI Inflation

(+0.4)

(+1.4)

(+1.2)

(+1.5)

(+3.0)

(+2.1)

(+1.3)

(+2.2)

(+2.0)

Core CPI Inflation

(+1.3)

(+1.6)

(+1.5)

(+1.5)

(+2.3)

(+1.8)

(+1.7)

(+1.9)

(+1.8)

Unemp. Rate (%), Period Ave.

13.0

9.0

8.0

6.3

5.9

5.5

8.7

5.8

5.1

Fed Funds Rate, End Period (%)

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

0.00-0.25

10y Treas. Yld., End Period (%)

0.66

0.50

0.50

0.50

0.50

0.50

0.50

0.50

0.50

S&P 500, End Period

3100

3300

3300

3300

3350

3400

3300

3500

3800

$/€, End Period

1.12

1.20

1.20

1.20

1.20

1.20

1.20

1.20

1.20

¥/$, End Period

108

105

105

105

105

105

105

105

105

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, +1 646 583 3163, michael.pearce@capitaleconomics.com