Tuesday, September 15, 2020

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How strong is the labor market?

As the third quarter nears its end, investors, workers, lawmakers, and central bankers are all pondering the next phase of this pandemic-induced economic cycle.

And one question more than any other sets a baseline for what happens next in the U.S. economy: how strong is the labor market?

Earlier this month, the August jobs report came in stronger than expected. Nonfarm payrolls grew by more than 1.3 million. The unemployment rate fell to 8.4%. This report still showed, however, that total job losses since the pandemic began are in excess of 11 million. One better-than-forecast report does not take away from a deeply altered employment picture in just a few short months.

But a note to clients published Monday, Paul Ashworth at Capital Economics posits that the labor market might be in better shape than headline data suggests. And he argues that this could have huge implications for the future of economic growth in the U.S. and how Federal Reserve policy unfolds in the coming years.

“With initial jobless claims still running at close to one million per week, it could be argued that, at 8.4% in August, the unemployment rate is not capturing the full extent of the slack in the [labor] market,” Ashworth writes.

“But the survey evidence and the job turnover data paint a very different picture — suggesting that there is less slack now than there was coming out of the financial crisis a decade ago, which is a reason to suspect that wage growth and price inflation may prove to be more resilient this time too.”

And this would indeed be an out-of-consensus result.

Last week, The Morning Brief outlined the long road ahead for the labor market based on the very job openings data Ashworth cites as pointing to a stronger employment picture than consensus expectations. And elsewhere on Monday, Gregory Daco at Oxford Economics called the labor market a “glass half-empty” situation, not only due to the cumulative job losses to date but also because the benefits of this initial snapback have been unevenly distributed so far.

“As a result of the fiscal, labor market, and stock market developments, we’re witnessing the emergence of a ‘K- shaped’ recovery,” Daco writes. “Those fortunate enough to have retained their income will be able to continue spending, but those experiencing interruptions in fiscal aid, persisting joblessness, or [who are] unable to benefit from stock market gains are cutting back on consumption.”

If the labor market is tighter than suggested by headline data, however, the recovery could quickly even out. And as Ashworth sees it, rising quits, slowing layoffs, and the number of small businesses having trouble filling jobs from the NFIB’s survey are more consistent with an unemployment rate of 5% than 8%. Ashworth also sees the rise in permanent unemployment — a concerning sign for the economy — as more consistent with the 2001 recession and the 2009 post-crisis recession.

“We suspect that the more modest permanent job losses explain why small businesses are saying it is still surprisingly difficult to fill jobs and why households believe that jobs are still relatively plentiful,” Ashworth notes.

Later today, the Federal Reserve’s two-day policy meeting will begin and on Wednesday at 2:30 p.m. ET, Fed Chair Jerome Powell will face questions from reporters after the Fed publishes its latest statement and summary of economic projections. It will be the first FOMC meeting since the Fed announced its new policy framework at the Jackson Hole Symposium last month.

This new average inflation targeting implies the Fed will be willing to let the economy “run hot” for a bit before raising interest rates.

But a labor market that resembles 2015 more than 2009 could result in wage growth and a pickup in inflation that quickly challenges the Fed’s operating structure.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today


  • 8:30 a.m. ET: Empire Manufacturing, September (6.8 expected, 3.7 in August)

  • 8:30 a.m. ET: Import price index, August month-on-month (0.5% expected, 0.7% in September)

  • 8:30 a.m. ET: Export price index, August month-on-month (0.4% expected, 0.8% in July)

  • 9:15 a.m. ET: Industrial production, August month-on-month (1.0% expected, 3.0% in July)

  • 9:15 a.m. ET: Capacity utilization, August (71.5% expected, 70.6% in July)


  • 4:05 p.m. ET: Adobe (ADBE) is expected to report adjusted earnings of $2.41 per share on revenue of $3.16 billion

  • 4:00 p.m. ET: FedEx (FDX) is expected to report adjusted earnings of $2.69 per share on revenue of $17.55 billion

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