The Market Today
Mixed Labor Data Show Re-Entrance to Labor Market but Slowing Recovery of Lost Jobs
by Craig Dismuke, Dudley Carter
Census Hires Boost Payrolls but Pace of Improvement Slowing: The economy added 1.37mm nonfarm payrolls (exp. 1.35mm) in August which included 1.03mm private payrolls (exp. 1.33mm) and 344k government sector payrolls (exp. 25k). The better-than-expected government jobs results came from a 251k increase in federal jobs including 238k temporary census workers. By sector, goods-producing jobs growth weakened while leisure and hospitality continue to show significant volatility in the services sector. The leisure sector only recovered 147k payrolls in August and continues to have more than 4mm lost jobs since February. More broadly, total nonfarm payrolls remain 11.5mm below their pre-virus level having recovered less than half of the lost jobs, and the pace of improvement has slowed.
Unemployment Rate Drops Surprisingly to 8.4%: The household report showed a shocking decline in the unemployment rate, down from 10.2% to 8.4% (exp. 9.9%). The details included a 968k gain in the labor force and a 3.76mm increase in people reporting as employed. The discrepancy between the jobs added in the household and establishment reports was the largest on record. The combination brought the participation rate up from 61.4% to 61.7%. Much of the jobs gains came from job recoveries; the number of people reporting as temporarily unemployed fell 3.1mm to 6.2mm. The number of persons losing jobs permanently shot higher in August. Permanent job losers increased 534k and those reporting as unemployed-not-temporarily increased 448k. These are the categories in which the more lasting damage to the economy will be evident.
The number of persons reporting as unable to work or working fewer hours due to the pandemic declined from 31.3mm to 24.2mm. The percent of employees who teleworked due to the pandemic declined from 26.4% to 24.3%. Related to the classification errors of temporarily displaced workers in recent months, the BLS reported that the unemployment rate would have only been 0.7% higher in August than reported.
Bottom Line: With the exception of an unexpected and temporary increase in census workers, the nonfarm payroll report was weaker than expected and shows a slowing pace of improvement after recovering less than half of the lost payrolls. The decline in the unemployment rate was better than expected but there are signs of more lasting damage building up. We remain concerned about the pace of improvement going forward.
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Most of the news headlines on Thursday were reserved for the sharp and abrupt end to the previously unshakeable equity rally. U.S. cases showed steady growth of 0.7%, in line with the recent seven-day average, while the worrisome increase across Europe continued. Italy, France, and Spain all posted above-average daily increases. Norway advised its residents against any non-essential travel to Italy. On the medical front, Pfizer said it expects to have 30k patients enrolled in its vaccine trial within the next couple of days with results potentially available in October. Gilead said it will be able to fully satisfy global demand for its remdesivir drug by next month.
Equities Run Had Begun to Draw Skeptics: U.S. equities had gone on a tear in recent months as central banks and governments around the world pumped liquidity into the financial markets and stimulus into their economies to limit the damage caused by the coronavirus pandemic. Tech benefited notably more than other sectors as low rates boosted valuations and a shift to working (and schooling) from home drove demand for key services. The tech-heavy Nasdaq was the first to fully recover from the pandemic and the tech sector helped the S&P 500 set a string of records in recent weeks, the first since February. The nearly uninterrupted momentum began to create skepticism around equity levels and led market-focused news outlets to begin questioning the sustainability of the historic bull run.
Correction Comes Quickly: The called-for correction came abruptly and sharply Thursday as stocks plunged by the most since June. The S&P 500 slumped 3.5%, its worst day since July 11, while the Dow tumbled 2.8%, its largest loss since June 26. With tech leading the selling, the Nasdaq tanked 5.0% to notch its sharpest drop since June 11. Signs have been piling up for weeks that the recovery appeared to be slowing but were seemingly ignored by the stock market. Earlier in the morning, claims data, adjusted for a methodology change related to seasonal adjustments, showed the labor market recovery slowing and the services ISM, while still solid, leveled off after stronger readings in June and July (more below). The slump for the major equity indices reinforced the recent turn lower in Treasury yields, although the magnitude of the move in rates was comparatively minor. The 2-year yield inched down 0.6 bps to 0.127% while the 10-year yield slipped 1.3 bps to 0.64%, a fifth consecutive decline to the lowest level since August 21.
Weak Tech Shares Keep Wall Street Futures on Edge Before U.S. Payroll Data: U.S. tech shares remained weak on Friday although the negative momentum slowed after the sharp drop in the prior session. Yesterday’s market collapse in the U.S. drove equities across Asia notably lower to close out the week while Europe’s Stoxx 600 had declined 0.2% after falling 1.4% on Thursday as Wall Street rolled over. Except for a smaller-than-expected recovery in German factory orders, both continents’ economic calendars were quiet and uneventful, keeping the focus on yesterday’s U.S. market drop and this morning’s U.S. payroll data. Before the jobs report, Nasdaq contracts had declined more than 1% while S&P 500 futures had slipped 0.2% and the Dow edged 0.2% higher. With equities slowing their declines, Treasury yields, which dropped only modestly amid the pullback in stocks, had stabilized. The curve was flat out to five years while the 10-year yield had added 1.1 bps to 0.65% and the 30-year yield had risen 2.0 bps to 1.4%. The entire yield curve shifted higher and steeper after the beat for unemployment with the 10-year yield 2.4 bps higher at 0.66%.
ISM Services Index Slows to Still-Solid Level in August: The ISM’s Services index pointed to continued expansion of the largest portion of the U.S. economy, but the pace of activity cooled from stronger readings in June and July. The headline PMI slipped from 58.1 to 56.9 last month, nearly in line with expectations for 57.0. New orders fell 10.1 points from their all-time high to 56.8, still a respectable level. The production index slipped 4.8 points from its best level since 2004 to a solid 62.4. Employment improved 5.8 points to 47.9, its highest level since February but a sixth consecutive contraction. Despite the month-over-month decline signaling slowing activity, the services sector continued to expand while the labor market recovery continues to show signs of slowing.