Lump of coal for the labor market Lump of coal for the labor market\images\insights\article\santa-stocking-coal-small.jpg December 6 2020 December 4 2020

Lump of coal for the labor market

Lawmakers deserve coal in their stockings for not passing a new stimulus bill.

Published December 4 2020

Bottom Line The heretofore powerful labor market recovery from last April’s trough slowed noticeably in November, amid an accelerating surge in coronavirus infections and the continued absence of any Phase 4 fiscal stimulus out of Congress.

Nonfarm payrolls in this morning’s November report rose by a weaker-than-expected gain of only 245,000 jobs (versus consensus expectations for a much stronger increase of 460,000), compared with a downwardly revised gain of 610,000 jobs in October (originally reported as an increase of 638,000). September, in sharp contrast, was revised up by 38,000 jobs to a strong final gain of 711,000.

Our own more conservative forecast here at Federated Hermes was for a well-below consensus gain of only 370,000 jobs, largely due to recent misses in jobless claims and the ADP private payroll survey, which are both important inputs in our employment model.

Private payrolls performed better in November, although they were still disappointing, rising by a weaker-than-expected gain of 344,000 jobs (compared with consensus expectations for a gain of 540,000), with a negative revision of 29,000 jobs in October to a gain of 877,000. Likewise, September was revised up by 38,000 jobs to a powerful final gain of 930,000.

The difference between November’s private and nonfarm payrolls was a decline of 99,000 government jobs last month (versus losses of 267,000 and 219,000 jobs in October and September, respectively). This was largely due to the retirement of another 93,000 temporary Census workers last month.

Will Congress finally get off the schneid? House Democrats and Senate Republicans have been engaged in political gamesmanship for the last seven months, toying with a series of moral hazards to score points ahead of the contentious presidential election. They have been unable to consummate their proposed Phase 4 fiscal stimulus negotiations, and the American people are paying the price with this poor November jobs report. Clearly frustrated with the inability of this do-nothing Congress to reach a deal, several centrist Senators from both parties stepped forward this week and proposed a bipartisan $908 billion bill to get the ball rolling again.

Moreover, the final Federal Open Market Committee meeting of the year takes place on Dec. 15-16. While we don’t expect any change in interest rates, perhaps the Fed’s ongoing disappointment and frustration with Congress’ fiscal policy inertia might spark more aggressive monetary policy, such as extending the duration of its bond buying program or more QE.

Internals weak The household survey declined by 74,000 jobs in November, after gaining 2.243 million jobs in October, 275,000 jobs in September and 3.756 million jobs in August. In addition, the civilian labor force shrunk by 400,000 workers in November, compared with an increase of 724,000 workers in October and a decline of 695,000 in September. Finally, the number of unemployed workers declined by 326,000 people in November, which pales in comparison to the declines of 1.52 million in October, 970,000 in September and 2.8 million in August.

Consequently, the unemployment rate (U-3) declined for the wrong reasons to 6.7% in November from 6.9% in October, sharply below its peak in April at 14.7% (the single worst month for the labor market since record-keeping began in 1939). It was a similar case for the labor impairment rate (U-6). It also is known as the underemployment rate and is a better and broader barometer of the labor market because it includes both part-time and discouraged workers. It eased to 12% in November from 12.1% in October and a record high of 22.8% in April. Finally, the labor force participation rate surprisingly slipped to 61.5% in November from 61.7% in October, but that’s still above its trough of 60.2% in April, which was a 47-year low.

Ho, ho, ho? Transportation and warehousing added 145,000 workers in November, which was the largest amount since 1997, while retail lost 35,000 employees. We’re still expecting a solid Christmas, up by perhaps 4-5% year over year, but those gains will be driven by a surge in e-commerce, at the expense of brick-and-mortar sales, which dictated that mix shift in hiring.

Claims and ADP soft Initial weekly jobless claims (an important leading indicator for the labor market) have fallen 90% from a peak of 6.867 million on March 28 to 712,000 on Nov. 28. Importantly, since the $600 weekly unemployment bonus expired, weekly claims have fallen by half from 1.435 million on July 25. But initial claims had backed up to 748,000 during the survey week of Nov. 14, which negatively impacted this morning's nonfarm payroll report.

Continuing claims, which are a better measure of the recovering health of the labor market, have fallen 78% from their peak at 24.9 million on May 9 to 5.5 million on Nov. 21. Since the unemployment bonus expired in July, continuing claims have declined by two-thirds from 16.1 million on July 25.

The ADP private payroll survey posted a much weaker-than-expected gain of only 307,000 jobs in November, compared with an expected gain of 440,000 workers and October’s upwardly revised increase of 404,000.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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