Millions of job losses coming - Capital Economics
US Economics

Millions of job losses coming

US Employment Report Preview
Written by Andrew Hunter

The March employment report is more or less irrelevant at this stage because we already know that millions of workers have been laid off since the survey was conducted earlier this month. For what it’s worth, we expect a 95,000 increase in non-farm payrolls, but the April report is on course to be by far the weakest ever.

The March employment report is more or less irrelevant at this stage because we already know that millions of workers have been laid off since the survey was conducted earlier this month. For what it’s worth, we expect a 95,000 increase in non-farm payrolls, but the April report is on course to be by far the weakest ever.

Although the labour market started the year on a strong note, with non-farm payrolls surging by 273,000 in both January and February, that picture has already changed dramatically as the coronavirus outbreak has taken a stranglehold on the economy. The nationwide closure of restaurants, bars and other public venues, along with the total lockdowns in place in many states, resulted in an unprecedented surge in initial jobless claims to 3.3 million last week. (See Chart 1.) With reports suggesting that many state employment offices have struggled to process the tidal wave of claims, last week’s data will not have captured the full extent of the damage.

Chart 1: Initial Jobless Claims (000s)

Source: Refinitiv

With containment measures still being extended across the country as the virus continues to spread rapidly, we now expect GDP to plunge by 40% annualised in the second quarter, with as many as 14 million jobs likely to be lost over the coming months. (See here.) That would push the unemployment rate up to around 12%, higher than the 2009 peak.

The March payroll survey was conducted in the second week of this month and therefore came too early to capture the full hit to the labour market from the pandemic. It’s true that initial jobless claims had already started to rise that week, but “only” to 282,000. That echoes the message from other high-frequency activity indicators, which only really began to plunge in mid-March. (See here.) Meanwhile, despite the sharp drop in the Markit PMI employment indices this month, they are still at a level consistent with payrolls rising modestly.

As a result, our model suggests that non-farm payrolls rose by 95,000 in March, potentially supported by further Census hiring (although the coronavirus has thrown the future of this year’s Census into question). That would probably keep the unemployment rate unchanged at a 50-year low of 3.5%. But that will mark the end of the labour market recovery, with the decline in payrolls in April likely to be in the millions and the unemployment rate set to jump.

The unique nature of the coronavirus downturn means that the economic data will be less reliable than usual over the coming months. Businesses forced to close won’t respond to the BLS’s surveys, and those that do will by definition be relatively less affected by the pandemic. The BLS’s firm birth/death model attempts to account for such distortions, but it is slow to adjust even during normal recessions. The unprecedented speed of the recent business closures means it probably won’t prevent the payrolls data from being biased upwards over the coming months. There is also uncertainty over the impact on the unemployment rate in the household survey, which could depend on whether workers class themselves as on temporary layoff or as employed but on unpaid leave, and also on whether industry-wide shutdowns prevent them from actively searching for new jobs.

Regardless, it’s clear than the pandemic will have a seismic impact on the labour market. A lot of that damage will unwind fairly quickly once the virus is brought under control, but the unemployment rate is likely to remain elevated for a prolonged period.

Table 1: Employment Data

Labour Market Indicators

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

212

215

213

215

220

234

215

214

998

Worse

Jobless Claims (for week including the 12th)

216

211

210

218

228

235

223

211

282

Worse

Challenger Job Cut Announcements (SA)

42.2

57.4

44.0

52.6

44.5

39.6

27.8

30.2

31.8

Worse

Job Openings Rate

4.6

4.5

4.4

4.6

4.3

4.1

4.4

Better

Markit Manufacturing Employment Index

49.8

50.1

50.9

51.3

52.7

51.4

51.1

50.5

47.5

Worse

Markit Services Employment Index

52.5

50.4

48.6

47.5

50.5

51.7

51.8

51.0

47.7

Worse

ADP Private Payroll Employment Survey

150

166

164

73

161

167

209

183

Worse

CE Estimated Change in Non-Farm Payrolls2

177

189

178

178

201

186

223

241

95

Consensus Forecast for Non-Farm Payrolls

164

158

145

89

180

164

160

175

-293

Actual Change in Non-Farm Payrolls

194

207

208

185

261

184

273

273

Actual Change in Private Payrolls

160

157

195

190

247

164

222

228

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

3.7

3.7

3.5

3.6

3.5

3.5

3.6

3.5

3.5

4.0

Change in Household Employment

198

549

403

246

-8

267

-89

45

All Employees Hours Worked

34.3

34.4

34.4

34.4

34.3

34.3

34.3

34.4

34.4

34.1

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

0.3

0.4

0.0

0.3

0.4

0.1

0.2

0.3

0.4

0.2

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

3.5

3.5

3.1

3.2

3.3

3.0

3.1

3.0

3.1

2.9

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


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com
Sepideh Dolatabadi, Econometrician, sepideh.dolatabadi@capitaleconomics.com

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