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Digging further out of the hole with the June jobs report

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By Andrew Szczurowski, CFAPortfolio Manager, Global Income Group, Eaton Vance Management

Boston - For the second straight month, the jobs report surprised to the upside. The US economy added 4.8 million jobs in June, beating the 3.2 million in gains estimated by economists. We are in unprecedented times, which makes forecasting economic data mostly a crapshoot.

Payroll numbers in 2020 are so far outside the historical norm: Going back to 1960, there were only three months with job gains more than 500,000, and never a month with more than 800,000 job losses. This year, however, the US economy lost nearly 21 million jobs in April and gained close to 5 million jobs last month.

We only point this out because US payrolls still have to add back another 14.6 million to return to where we were in February. Now we are in the initial bounce, the easiest phase of the economic recovery. What is still unknown is how sharp the rest of the rebound will be and where employment will eventually settle.

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Monitoring the permanently unemployed

While the headline number was better than expectations, there was one glaring negative in the report that bears watching over the coming months — the number of permanently unemployed, who won't have their jobs waiting for them when normalcy resumes. Unfortunately, that number is likely to keep growing as the stimulus measures wear off.

In June, there were 588,000 workers who lost their jobs permanently. Since February, the total is 1.6 million, or just over 1% of the labor force. If everyone else who was temporarily unemployed got their jobs back tomorrow, the jobless rate would still be more than 1% higher than before the coronavirus — not even factoring in all the recent grads and other entrants into the labor force. We think this will be the most important number to monitor, as it will give us an early idea of where the unemployment rate may end up.

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Other details of the US employment situation

Average hourly earnings fell 1.2% month over month, as low wage workers were added back into the labor force. Remember that this number actually spiked in March and April because low wage workers were hit hardest with job losses, which inflated the gain in average hourly earnings. With the labor market healing over the coming months as service sector jobs return, look for average hourly earnings to continue to decline.

The unemployment rate fell from 13.3% to 11.1% — beating economist estimates of a decline to 12.5% — but is still 7.6 percentage points above where it was in February. The underemployment rate, which includes those not working at full capacity, has come down to 18%, 11 percentage points above February. While the decline in unemployment is certainly welcome news, Federal Reserve policymakers aren't expecting the rate to decline at this pace for much longer, as they project a 9.3% jobless rate at year end.

Sectors and industries on the rebound

Naturally, sectors that lost the most jobs have gained the most back over the past two months. Bars and restaurants led the way in June, adding roughly 1.5 million jobs, but still sit more than 3 million jobs below February's level. Overall, the retail trade sector added 740,000 jobs, as reopening plans were progressing through most of the country in mid-June, when the payroll survey was conducted.

Though employment in education and health services increased by 570,000, that is still 1.8 million below February. By contrast, the manufacturing sector added over 350,000 jobs in June to move just 750,000 jobs short of February's count. As we've said before, the pandemic-related shutdowns hit the service sector much harder than manufacturing.

Bottom line: It is great to see the labor market bounce back sooner than expected. However, it is far too soon to declare victory. The labor market recovery could get more difficult over the coming months. If businesses aren't able to operate at 100% capacity, they likely won't need 100% of their prior workforce to return.

It will also be tricky to forecast jobs over the coming months if we continue to have coronavirus clusters pop up in various parts of the country, causing new restrictions on businesses. In next month's jobs number, we could have large economic centers like New York City enter more lax reopening phases, which should boost employment, while others like Texas and California have to halt and roll back some of their reopening plans.

In the meantime, the weekly jobless claims numbers will give us a better idea of how much progress the labor market recovery continues to make.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.