U.S. Labor Indicators Are More Optimistic Than Headlines Suggest

The U.S. economy continues to put the COVID-19-induced recession further into the rear-view mirror, as indicated by the recently released +4.0% first estimate of fourth quarter 2020 GDP. Consecutive positive GDP prints stand at two after the +33.4% third quarter rebound.

Fortunately, initial jobless claims appear to have peaked, consistent with a slowing in COVID-19’s spread. The U.S. labor market should continue to heal as vaccinations help to curb the virus.

But ominously, the December U.S. employment report showed 140,000 overall job losses (revised in the January report to wider loss of 227,000 jobs), well below the forecast of even the most pessimistic economists. It was the worst month for job creation – outside of the quick 2020 recession – in over a decade.

Yet encouraging signs of resilience in the jobs numbers better represent the underlying strength of the U.S. economy than the headlines suggest. Beneath the surface, the numbers tell a more optimistic story: job losses were concentrated in industries most exposed to COVID-19 risk.

Stripping out pandemic-induced job losses, the rest of the labor market appears much stronger. Construction and manufacturing gained jobs, as did many service industries where in-person interaction is less crucial.

The leisure and hospitality industry shed over 500,000, most at restaurants or bars. Many owners had little choice but to reduce staff with increased indoor dining restrictions across much of the country. Many of these job losses could prove temporary when social distancing measures ease.

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Leisure and hospitality bore the greatest impacts of the initial wave of stay-at-home restrictions in March and April 2020, with the industry shedding more than 8 million jobs. Approximately 60% of overall job losses were recovered between May and November, with an even greater recovery rate of 65% among restaurants and bars.

Because they tend to reflect real-time conditions and highly correlate to GDP, jobless claims are often useful in gauging if an economy is entering or exiting a recession. While they can provide less lead time, they make up for it with a strong track record of no meaningful false positives.

Initial jobless claims were among the few indicators that were positive following the 1980 recession, for example, then turned back negative ahead of the 1982 double-dip.

In late March 2020, U.S. jobless claims soared to 6.8 million. As the economic recovery and re-opening unfolded, they steadily receded. They have been range-bound since Labor Day, rising from a low of 711,000 in early November to 927,000 in early January 2021, as the post-holiday spike in COVID-19 cases led to tighter stay-at-home restrictions. They recently fell to 793,000. .

It was unsurprising that December was the first month of the recovery to see an increase in the number of workers on temporary layoff (aka furlough). As individuals lose their jobs, they become eligible for, and typically apply to receive, state unemployment benefits.

The number of first-time claims for these benefits is released weekly by the U.S. Department of Labor. This provides high frequency data on the health of the labor market and U.S. economy, given the importance of income as a driver of consumption, and consumption as a driver of GDP.

Because it can be volatile in any given week, we focus on the four-week moving average. This helps to remove distortions while providing a timely read that can quickly show changes.

An economic and market bottom clearly formed early in 2020’s second quarter, but U.S. data suggests a softer growth period may be beginning to emerge. Monthly retail sales – the poster child of the V-shaped recovery – suffered a third consecutive decline in December.

This soft patch is unlikely to lead to a double-dip recession. Any economic weakness should prove transitory. If the national COVID-19 vaccination campaign continues to progress well, the broad reopening of the economy should lead to a stronger second half of 2021.

Jeffrey Schulze, CFA, is a director and investment strategist at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice.

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