Catastrophe - Capital Economics
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Catastrophe

US Employment Report Preview
Written by Paul Ashworth
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We estimate that non-farm payroll employment fell
by between 20 and 25 million in April, with the
unemployment rate surging to between 15% and
20%. That would be an unprecedented loss of jobs
in a single month, equating to more than double the
total decline in employment during and after the
financial crisis.

We estimate that non-farm payroll employment fell by between 20 and 25 million in April, with the unemployment rate surging to between 15% and 20%. That would be an unprecedented loss of jobs in a single month, equating to more than double the total decline in employment during and after the financial crisis.

There is no precedent for the sudden-stop in the economy in mid-March, when the COVID-19 outbreak prompted most States to initiate lockdowns. Those lockdowns hit retail and food services harder than most, which means we can expect a particularly big impact in the labour market because, although the two sectors were only 8% of GDP, they accounted for 20% of employment. Even though the survey was conducted before the lockdowns began in earnest, payroll employment still fell by 701,000 in March and since then 30 million initial jobless claims have been filed in the past six weeks.

In the week that April’s employment surveys were conducted, the insured unemployment rate – based on weekly continuing claims – stood at more than 10% which, based on the fairly good historical relationship, is consistent with the monthly U3 unemployment rate climbing to 23%. (See Chart 1.) (The insured rate currently stands at a record high 12.4%, pointing to a further rise in the U3 rate in May.) But with the recent CARES Act widening the eligibility for unemployment insurance, we suspect that the monthly unemployment rate was probably a little lower than that.

Quite perversely, a higher unemployment rate would be an encouraging sign, because it would suggest more people were on a temporary layoff rather than permanent job losers. The former still count as unemployed even if they were not actively looking for work, whereas the latter would not. Since actively seeking a job was almost impossible during the lockdowns, many of those permanent job losers will end up being classified as leaving the labour force rather than unemployed.

Chart 1: Insured & U3 Unemployment Rates (%)

Source: Refinitiv

Unemployment increased by 1.35 million in March, with temporary layoffs up by 1.05 million. In addition, as the BLS acknowledged, a further 1.4 million people should have been classified as on temporary layoff but were misclassified as absent from work and therefore still employed. There were only 177,000 permanent job losers in March but, more tellingly, the labour force declined by 1.6 million. Nevertheless, even if we include people who were classified as outside the labour force because they were not actively seeking work, it still looks like there were more temporary layoffs than permanent job losses.

Admittedly, if the lockdowns drag on then temporary layoffs could still develop into permanent job losses. But, for now at least, those on temporary layoff have a greater chance of returning to paid employment in the next few months. That is why, even if the unemployment rate were to hit 20% in April, we still expect it to be below 10% again before year-end.

Otherwise, the lockdowns will also trigger a very sharp decline in average weekly hours worked but, because the job losses were concentrated in low wage sectors like retail and food services, they will have a perverse effect of driving average hourly earnings growth higher.

Table 1: Employment Data

Labour Market Indicators

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

215

213

215

220

234

215

214

2,667

5,023

Worse

Jobless Claims (for week including the 12th)

211

210

218

228

235

223

211

282

5,237

Worse

Challenger Job Cut Announcements (SA)

57.4

44.0

52.6

44.5

39.6

57.3

52.1

215.0

Worse

Job Openings Rate

4.5

4.4

4.6

4.3

4.1

4.4

4.3

Worse

Markit Manufacturing Employment Index

50.1

50.9

51.3

52.7

51.4

51.1

50.5

47.5

37.7

Worse

Markit Services Employment Index

50.4

48.6

47.5

50.5

51.7

51.8

51.0

47.7

37.4

Worse

ADP Private Payroll Employment Survey

166

164

73

161

167

205

179

-27

Worse

CE Estimated Change in Non-Farm Payrolls2

189

178

178

201

186

223

241

95

-22,500

Consensus Forecast for Non-Farm Payrolls

158

145

89

180

164

160

175

-293

-20,000

Actual Change in Non-Farm Payrolls

207

208

185

261

184

214

275

-701

Actual Change in Private Payrolls

157

195

190

247

164

179

242

-713

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

3.7

3.5

3.6

3.5

3.5

3.6

3.5

4.4

17.5

14.0

Change in Household Employment

549

403

246

-8

267

-89

45

-2,987

All Employees Hours Worked

34.4

34.4

34.4

34.3

34.3

34.3

34.4

34.2

33.0

33.9

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

0.4

0.0

0.3

0.4

0.1

0.2

0.3

0.4

0.6

0.2

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

3.5

3.1

3.2

3.3

3.0

3.1

3.0

3.1

3.5

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

Sources: Refinitiv, Capital Economics


Paul Ashworth, Chief US Economist, paul.ashworth@capitaleconomics.com
Sepideh Dolatabadi, Econometrician, sepideh.dolatabadi@capitaleconomics.com