A cautious outlook on the U.S. economy
- Our Blog
A recession has been confirmed. But recent employment data was unexpectedly positive.
In April, we wrote about an inevitable contraction in the U.S. economy as a result of the COVID-19 intentional shutdown. Now the data is in, and it’s official. The National Bureau of Economics Research (NBER), the agency that officially designates recessionary periods, has made its call: the longest economic expansion since the 1800s ended in February, and the U.S. economy entered a recession. In its announcement, NBER noted “A peak in monthly economic activity occurred in the U.S. economy in February 2020. The peak marks the end of the expansion that began in June 2009 and the beginning of a recession. The expansion lasted 128 months, the longest in the history of U.S. business cycles dating back to 1854.”
While that expansion was notable for its length, no one will eulogize its vigor. At 2.3% annualized growth, it was the weakest recovery on record.
The mandated shutdown had an enormous impact on the economy. No one should be surprised at the deeply negative news flow on employment, retail sales and other data releases. But more recently, as states have moved to reopen their economies, there has been marginal improvement in data such as the most recent jobs report, which greatly exceeded expectations.
Better data on employment
The latest payroll report showed a surprising rise in employment and came expectations of a large decline. Payroll data showed an increase in employment by 2.5 million versus a consensus expectation of 7.5 million in job losses. The headline unemployment rate fell to 13.3% from 14.7% in April, and the labor force participation rate bounced off the bottom. How did they get it so wrong? In our view, consensus estimates are highly suspect in periods of dislocation when the statistical accuracy of predictive models breaks down. A combination of reopening and the disbursement of Paycheck Protection Plan loans — which are conditional on maintaining payroll — likely contributed to employment gains. Leisure and the hospitality sector, recently devastated by the collapse of tourism and business travel, saw the greatest gains (1.2 million) while the government sector continued to shed jobs.
The headline may belie the underlying story, but only to a degree. The Bureau of Labor statistics reported that an additional 4.9 million people said that they were “not at work for other reasons,” and these workers were misclassified as employed. Counting these folks as unemployed would have suggested an official unemployment rate (referred to as U3) closer to 17% in May (down from about 20% in April). Regardless of whether we count this category or not, the trend in May suggests that hiring is back up and about 10% of the total job losses were rehired in May. Despite the positive surprise in payroll —suggesting the beginning of the normalization phase, there are many workers leaving the labor force, as seen in the decline in the participation rate. This will likely keep wage gains low for several months. This will also keep the Fed on the sidelines for a long time to come.
Better data on business activity
Outside of the positive jobs data, manufacturing and services — whose business activity is measured by the Purchasing Managers Indexes (PMI) — have rebounded from their bottom as the economy has reopened. April may have been the bottom in PMIs, but a recovery possibly began in May.
Bottom line: Data is encouraging, but keep an eye on the pandemic
It’s important to keep a discerning view of the data. The recession declared by NBER is likely to be severe but short, with a long period until we see a recovery to 2019 levels (with significant variation by industry). The data is encouraging, but we continue to hold to our view that the path and pace of recovery is contingent on infection rates. We’re seeing better economic data now, but a continuation is dependent on no further viral outbreaks or mandated shutdowns, particularly in large economic centers.