As bad as it gets? - Capital Economics
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As bad as it gets?

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Written by Michael Pearce
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We estimate that non-farm payroll employment fell by 9 million in May, taking the cumulative decline since February close to 30 million and pushing the unemployment rate above 20%.

We estimate that non-farm payroll employment fell by 9 million in May, taking the cumulative decline since February close to 30 million and pushing the unemployment rate above 20%.

The loss of 20.5m jobs in April was as expected based on the tsunami of jobless claims, and the continued rise in claims since the April survey week points to another grim payroll figure in May. An additional 10m Americans had filed an initial claim by the May survey week, although the number of continuing claims actually fell in mid-May and has risen by only 3m since mid-April. (See Chart 1.)

Chart 1: Initial & Continuing Jobless Claims (Mn)

Source: Refinitiv

The drop in continuing claims suggests labour market conditions are now beginning to improve again as workers are recalled to their jobs, either because their employer has received funds through the Paycheck Protection Program or because businesses have reopened.

But that decline may have started too late in the month to make much difference to the May employment report, which is based on the week including the 12th. In addition, the continuing claims figures do not count the more than 7 million people separately claiming new Pandemic Unemployment Assistance (PUA) benefits, which are available to business owners, the self-employed and independent contractors. The upshot is that we expect the fall in non-farm payroll employment in May will be closer to the 10m indicated by the initial claims figure. We have pencilled in a decline of 9m.

On past form, the insured unemployment rate of 14.5% points to the official U3 unemployment rate surging close to 30%. (See Chart 2.) However, the BLS is still struggling to properly classify those not at work. There was a surge in the number of employed people absent from work due to “other reasons” in April. If they were classified as “on temporary layoff”, the unemployment rate would have been close to 20%, rather than the officially recorded 14.7%. Similar survey problems this time around means the increase in unemployment will be smaller than implied by the claims data. We anticipate the unemployment rate will rise to somewhere between 20-25%.

Chart 2: Insured & U3 Unemployment Rates (%)

Source: Refinitiv

Most job losses are still occurring in low wage occupations, meaning average hourly earnings probably rose sharply again in May. More relevant right now is the Atlanta Fed median wage tracker, which compares earnings of the same individuals across time and showed annual earnings growth easing to a near-two year low of 3.3% in April.

With most states now reopening and timely measures of activity and discretionary consumption showing a steady pick up, we expect employment to rise from June onwards. It will be years until the unemployment rate returns to pre-virus levels, but with most of the layoffs temporary, we expect the labour market to recover faster than usual, with the unemployment rate below 10% by the end of the year.

Table 1: Employment Data

Labour Market Indicators

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

213

215

220

234

215

214

2,667

5,040

2419

Better

Jobless Claims (for week including the 12th)

211

218

223

229

220

215

282

4,442

2,446

Better

Challenger Job Cut Announcements (SA)

44.0

52.6

44.5

39.6

57.3

52.1

215.0

705.2

Worse

Job Openings Rate

4.4

4.6

4.3

4.1

4.4

4.4

3.9

Worse

Markit Manufacturing Employment Index

50.9

51.3

52.7

51.4

51.1

50.5

47.5

37.7

38.2

Better

Markit Services Employment Index

48.6

47.5

50.5

51.7

51.8

51.0

47.7

37.4

39.2

Better

ADP Private Payroll Employment Survey

164

73

161

167

205

147

-149

-20,236

Worse

CE Estimated Change in Non-Farm Payrolls2

178

178

201

186

223

241

95

-22,500

-9,000

Consensus Forecast for Non-Farm Payrolls

145

89

180

164

160

175

-100

-4,250

-7,450

Actual Change in Non-Farm Payrolls

208

185

261

184

214

251

-881

-20,537

Actual Change in Private Payrolls

195

190

247

164

179

220

-853

-19,557

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

3.5

3.6

3.5

3.5

3.6

3.5

4.4

14.7

22.5

19.8

Change in Household Employment

403

246

-8

267

-89

45

-2,987

-22,369

All Employees Hours Worked

34.4

34.4

34.3

34.3

34.3

34.4

34.1

34.2

34.0

34.3

All Employees Ave. Hourly Earnings (%m/m)

0.0

0.3

0.4

0.1

0.2

0.3

0.5

4.7

1.5

0.9

All Employees Ave. Hourly Earnings (%y/y)

3.1

3.2

3.3

3.0

3.1

3.0

3.3

7.9

9.3

8.7

Sources: Refinitiv, Markit, Capital Economics

1Figures in blue are forecasts 2Based on the CE dynamic factor model. The model has a MSE of 41,000 and beats the consensus forecast 65% of the time.

Chart 3: Actual & Estimated Change in Non-Farm Payrolls (000s)

Sources: Refinitiv, Capital Economics


Michael Pearce, Senior US Economist, michael.pearce@capitaleconomics.com