Boston - The US economy lost an unfathomable 20.5 million jobs in April — unequivocally the worst month for the labor market in the country's history, as the coronavirus pandemic continues to exact a heavy toll on both the physical and economic health of the US population. What remains unknown is how many of these job losses could be temporary and how many jobs might be gone for good. For the time being, only 51% of the US population is working — the lowest share in the history of this series dating back to 1948.
Next month could be worse
As certain states begin to re-open parts of their economies over the coming weeks, we are likely to see peak joblessness soon. Keep in mind that Friday's payroll report was based off data from the week of April 12. According to the weekly jobless claims reports, unemployment continued to increase during the last two weeks of April. So next month's payroll report based on the week of May 12 could show worse numbers, even as businesses re-open. We're hoping that will be the worst print the US ever sees again.
The unemployment rate rose from 4.4% to 14.7%, but that ultimately underestimates the short-term toll on the labor market. The underemployment rate, including those not working at full capacity, rose from 8.7% to 22.8%. For some perspective, consider that the unemployment rate during the global financial crisis peaked at 10% and the underemployment rate peaked at 17.2%. The only ray of hope in this gloomiest of payroll reports is that 78% of the unemployed reported their layoffs as temporary, so hopefully those jobs could come back in short order.
Harder for services than manufacturing
Keep in mind that the US has transitioned to a service sector-driven economy over the 75 years since the end of World War II. The manufacturing sector is certainly in pain, and the longer the shutdown lasts, the more demand destruction we could experience in goods production. But the coronavirus-induced lockdown has extracted a greater toll on the service sector in the short term.
To elaborate just how devastating the damage to the service sector has been, nearly 108 million people were employed in the US private service sector two months ago; in April, over 17 million of them are at least temporarily out of work. The manufacturing sector employed roughly one-tenth as many as the service sector, and there were roughly 1.35 million manufacturing jobs lost last month.
Wage gains misleading
Wages were up dramatically in April, with year-over-year growth in average hourly earnings increasing from 3.3% in March to 7.9% in April. But unfortunately, this apparent gain is misleading. What actually happened is that the bulk of the layoffs occurred in lower-wage industries, which propped up the aggregate average hourly wage from $28.67 to $30.01.
As might be expected with a global quarantine, leisure and hospitality was the worst hit sector: With 16.9 million employed in the sector two months ago down to 8.7 million last month, nearly half are out of work. This is also the lowest paid sector in aggregate, with the sector average hourly wage of $16.86 two months ago at only 58% of the average US wage of $28.67. As bars, restaurants and hotels remain closed in most parts of the country, 5.5 million workers have lost their jobs at least temporarily, making the aggregate average hourly wage rise for the wrong reasons.
Markets look forward
What should be more important for forward-looking markets right now is how many of the current job losses will return in relatively short order, versus how many are ultimately gone for good. The tremendous rally in risk assets over the past few weeks suggests that investors may be expecting either a fairly quick recovery in the labor market, or that the Fed with its seemingly unlimited balance sheet will continue to support markets for as long as necessary. If so, then fundamental economic data may not matter for the time being.
Bottom line: My concern, however, is that markets might be overestimating how quickly the labor market heals. My fear is that the consumer psyche could take a long time to heal from the pandemic. As long as consumers demand some form of social distancing for the foreseeable future, it would be difficult for many businesses like restaurants, airlines, movie theatres, theme parks and hotels to survive at significantly lower capacity.