Led by the household survey, the labor market continues to heal.
Bottom Line As we approach the Labor Day holiday weekend, August’s employment results were much stronger-than-expected across the board, as the labor market continues to heal from its coronavirus-inflicted carnage. The U.S. added 1.371 million nonfarm jobs in August, modestly above consensus expectations for a gain of 1.35 million jobs. But that’s below July’s gain of 1.734 million, as the pace of recovery in the establishment survey continues to normalize. The household survey, however, added a stunning 3.756 million jobs last month, nearly triple July’s gain of 1.35 million jobs.
Consequently, the labor market is now roughly halfway home in its recovery. In the establishment survey, the U.S. lost almost 22.2 million nonfarm jobs during March and April, but regained 10.6 million (48%) over the past four months. We also lost nearly 25.4 million household-survey jobs during March and April, but have since recovered almost 13.9 million (55%). With more than 6.2 million workers still on “temporary layoff,” further gains are likely over the next several months, as Covid-19 infections and deaths continue to recede, we continue to make progress with vaccine development, and businesses gradually reopen and recall their furloughed workers.
Government hiring rose by 344,000 jobs in August, up from 253,000 jobs added in July. But federal hiring accounted for 251,000 of those jobs last month, which was paced by 238,000 temporary Census hires. Local hires related to restarting school accounted for 95,000 jobs in August. Retail added another 249,000 jobs last month, so that sector has now recovered 73% of the jobs lost from the pandemic. Leisure and hospitality rehired 174,000 workers, and temporary help—a leading indicator—added 107,000 jobs in August.
Importantly, the sizable household gains in August drove sharp improvement in several key metrics. The unemployment rate (U-3) plunged to 8.4% in August from 10.2% in July, down sharply from its peak in April at 14.7% (the single worst month for the labor market since record-keeping began in 1939). The labor impairment rate (U-6, also known as the underemployment rate) is a better and broader barometer of employment because it includes both part-time and discouraged workers. It plummeted to 14.2% in August, down from 16.5% in July and a record high of 22.8% in April. The labor force participation rate improved to 61.7% in August, up from 61.4% in July and 60.2% in April.
Recall that the Federal Reserve, in its Summary of Economic Projection in June, forecast that unemployment might recover to perhaps 9-10% by year-end, while several more optimistic private economists forecast a more accelerated recovery to 7-8%.
Average hourly earnings were unchanged at 4.7% in August on a year-over-year basis, down from an 8% gain in April. That is a positive, signaling a mix shift due to the re-entry of lower-income workers back into the labor market. Average weekly hours worked rose a tick to 34.6 in August.
Fiscal policy implications While this strong labor market rebound over the past four months will not dissuade the Fed from its accommodative monetary policy path, today’s solid jobs report could break the ongoing Phase 4 fiscal-policy stalemate in Washington. We believe that because the $600 unemployment bonus expired at the end of July, millions of workers returned to their jobs in August to support their families, boosting today’s household survey. So perhaps Congress and the Administration can now find some common ground on a $300-400 per week unemployment bonus, provide some state and local support to keep teachers, nurses, police and firefighters in their jobs, and extend liability protection from junk lawsuits for businesses.
ADP missed The ADP private payroll survey posted a disappointing gain in August of only 428,000 jobs, compared with an expected increase of 1 million. But July was revised higher to a gain of 212,000 jobs, up from a preliminary gain of only 167,000.
Claims continue to fall Initial weekly jobless claims (which are an important leading indicator for the labor market) have plunged 87% over the past 22 weeks, from a peak of 6.867 million on March 28 to 881,000 on Aug. 29. Continuing claims have fallen 47% over the past 15 weeks, from their peak at 24.9 million on May 9 to 13.3 million on Aug. 22.
Equity markets ignore the good news Despite this favorable labor-market news over the past two days, the S&P 500 is down by more than 6% from new record highs on Wednesday, largely driven by declines in overbought technology stocks. The S&P had surged by more than 63% since the bottom of the market on March 23. So in our view, this is a healthy and long-overdue correction we had prepared for with our PRISM® asset allocation change last month. We reduced our overweight in domestic large-cap growth stocks (technology) to neutral and increased our allocation to domestic large-cap value stocks (such as financials, industrials, health care and consumer discretionary), small caps and international.
Happy Labor Day, enjoy the long holiday weekend!