Forecasting In Uncertainty: The US Jobs Report Does Not Mean A Quick End To The Pandemic Recession
Last Friday’s news of a drop in the unemployment rate to 13.3% and an increase of 2.5 million in employment was unexpected good news (see the US Bureau of Labor Statistics’ (BLS) recent Employment Situation Summary). The US stock market promptly rallied, and on Monday, June 8, the S&P 500 Index surpassed the level at the end of 2019, erasing all of the losses in March and April. But neither the employment report nor the stock market rally should be taken as evidence that the pandemic recession in the US is over or that the US tech market will recover in Q3 or even Q4 of 2020. Unfortunately, other signs suggest that what we have called Scenario A — a short recession and a quick rebound in tech spending in 2020 — still remains a lower probability than Scenario B, with a long recession and a prolonged downturn in US tech spending until 2021.
- Unemployment is still painfully high and, in reality, over 16%. While the official unemployment rate was reported as being 13.3% in May, down from 14.7% in April, the BLS press release also cited tabulation issues that understated the true unemployment rate: “If the workers who were recorded as employed but absent from work due to ‘other reasons’ [ . . . ] had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported.” These unemployment rates are far higher in this pandemic recession than the peak unemployment rate of 10% in the 2008-2009 recession. In addition, the amount of people working part-time for economic reasons and those not in the labor force who want a job remain much higher than in February. As a result, over 21% of the workforce is unemployed, underemployed, or discouraged (see The New York Times article, What to Make of the Rebound in the U.S. Jobs Report).
- The improvement in employment can be directly tied to the reopening of retail business and may not be sustained. The 2.5 million increase in employment — which comes from a separate survey of employers — is real. But it was concentrated in the limited reopening of industries that closed down to prevent the spread of COVID-19: restaurants (+1.4 million), retail (+0.4 million), ambulatory care (+0.4 million in offices of doctors, dentists, etc.), and construction (+0.5 million). But the ripple effects of these closures and a pandemic-related pullback in consumer and business spending showed up as weaknesses in other sectors of the economy. For example, employment at state and local governments dropped by 571,000 as steep drops in sales taxes collided with balanced budget mandates. Hospitals and nursing homes cut employment by 64,000 jobs. Meanwhile, manufacturers of apparel, oil and gas, automobiles, furniture, and other durable goods increased employment slightly, even though the demand for these goods remains weak. Financial services, insurance, professional services, and education services also saw no changes or increases in jobs, but they also are vulnerable if consumer and business activity don’t bounce back.
- Industries that sell technology to businesses started to cut jobs. Employment in computer systems design and development fell by 13,000 as businesses cut back new IT projects. Employment in telecommunications, data processing, and other information services dropped by 17,000, also related to businesses reducing their spending on these tech categories. The number of jobs in computer and communications equipment went down by 5,ooo.
- The job improvements were directly linked to the federal economic stabilization spending, which the Republican Senate is reluctant to expand. The Democratic House in May passed a $3 trillion economic stimulus program to support state and local governments and healthcare workers. The President and the Senate have resisted this additional stimulus, and some have argued that the improvement in employment shows it may not be needed. But Federal Reserve Chairman Jerome Powell and other leading economists have pointed out that current stabilization programs will phase out in July and have urged additional increases in federal spending to keep the economy from relapsing. Without such actions, Scenario B, a longer and deeper recession, becomes a near certainty.
- The pandemic is still running at high levels, and so will consumer caution. Some states such as California, Massachusetts, Ohio, Oregon, New Jersey, and New York with aggressive pandemic control measures have seen drops in the rates of cases and deaths and have embarked on phased reopenings of business. Other states, like Arizona, Florida, South Carolina, and Texas, have had a more casual approach to pandemic control and are experiencing increases in caseloads and deaths. As a result, the US overall daily caseload of new infections in the US continues to run at 20,000 to 30,000. Even if state governments continue to allow businesses to reopen, many consumers will remain reluctant to go out to restaurants or shopping. (See my blog post, Forecasting In Uncertainty: What If Stores Reopen And No One Comes?)
The employment data is just one of the indicators we track as we continually update and refine our forecasts for the US tech market. The data will continue to be volatile, with revisions and changes up and down. It is certainly possible that the improvements in employment in May are the early signs of an economic recovery that will gain momentum in Q3 2020. But until we see continued evidence of job growth in July and August, I continue to project that the worst-case scenario for the US tech market (what I now call Scenario B) is a 60% probability and the best-case scenario (Scenario A) is a 30% probability. (For my April US tech market forecast report, see “US Tech Budget Outlooks In A COVID-19 Recession.”)