Sept 2020 U.S. Jobs Report; Recent Layoffs; Labor Participation Rate Decline; GDP Forecasts

By the Curmudgeon

Executive Summary:

Total U.S. nonfarm payroll employment rose by 661,000 in September, and the unemployment rate declined to 7.9%, the U.S. Bureau of Labor Statistics (BLS) reported on Friday. In September, notable job gains occurred in leisure and hospitality, retail trade, health care, social assistance, and in professional and business services. Employment in government declined over the month, mainly in state and local government education. In September, nonfarm employment was below its February 2020 level by 10.7 million, or 7.0%.

In the BLS’ Household Survey for September, the unemployment rate declined by 0.5% to 7.9%, and the number of unemployed persons fell by 1.0 million to 12.6 million. Both measures have declined for five consecutive months but are higher than in February, by 4.4% and 6.8 million, respectively.

Similar patterns in industry payrolls ranging from Retail Sales and Construction to Manufacturing show a sharply slowing pace of economic improvement, but no economic recovery close to pre-pandemic levels. That is in contrast to both the headline real Retail Sales and Construction Spending series having recovered pre-Pandemic levels fully.

Other signs of a slowing U.S. recovery include a drop in household income at the end of the summer and smaller gains in consumer spending, the economy’s main driver.

ShadowStats’ John Williams continues to characterize recent U.S. economic performance as an “unfolding L-shaped economic recovery. Other economists realize the economy has slowed and the recovery will be bumpy.

“The pace of jobs recovery apparent in today’s report suggests that we will be counting the employment recovery in years, not months or quarters,” said Marianne Wanamaker, a labor economist at the University of Tennessee, Knoxville. “We’re not going to gain jobs as rapidly as we did in May and June.”

“It’s disturbing that we’re seeing such a dramatic slowdown in employment gains as we head into the fall,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “This is a red flag. We need aid now.”

Huge Layoffs Not Reported in Jobs Numbers:

Large corporate layoffs are sweeping across the U.S. Walt Disney Co. earlier this week announced permanent layoffs for 28,000 theme park workers who were previously on temporary furlough. CNBC reported in August that park shutdowns cost the company $3.5 billion.

Ralph Lauren said it would cut its global workforce by about 15% on September 22^nd, ultimately saving the retailer $180 million annually. Department store Kohl's is cutting 15% of its corporate workforce. The unspecified cuts will save the company $65 million annually, according to a September 15^thSEC filing.

American Airlines Group Inc. and United Airlines Holdings Inc. will proceed for now with a total of more than 32,000 job cuts after lawmakers were unable to agree on a broad coronavirus-relief package. That was after German airline Lufthansa announced on September 21^st that it is further shrinking its global fleet and workforce. The airline did not announce how many job cuts to expect but hinted it might be a bit more than 22,000 positions that were said to be “surplus personnel.”

Defense and aerospace giant Raytheon Technologies (Curmudgeon’s first job after graduating from college was with Raytheon Digital Systems Lab in May 1968) announced it will cut 15,000 jobs on September 17^th.

On September 30^th, the following layoffs were announced by major U.S. corporations:

· Shell (oil and gas) is cutting up to 9,000 jobs, or roughly 10% of its workforce. The layoffs are meant to cut costs amid the pandemic, as well as position the company to move away from fossil fuels.

· Allstate (home and auto insurer) said it would lay off 3,800 employees — or 8% of its workforce.

· Goldman Sachs (investment bank) is cutting 400 jobs, or 1% of its workforce, after briefly pausing job cuts amid the pandemic.

These recent layoff announcements aren’t reflected in the September jobs report, which includes data gathered in the first half of the month. Yet they are a definite indication that economic growth will slow in the months ahead.

Labor Participation Rate Decline is Worrisome:

The labor force participation rate decreased by 0.3% to 61.4% in September and is 2.0% lower than in February 2020. In particular, the September Labor Force has collapsed by (-4.463) Million Since Pre-Pandemic level at the end of January 2020. The employment-population ratio, at 56.6%, changed little over the month but is 4.5% lower than in February 2020.

Williams thinks the drop in the Labor Force reflects lost unemployed who have just dropped out of the system or are being missed in government surveying. Fully accounted for, those missing unemployed people would push headline September unemployment up to 10.6%, versus the headline 7.9% number reported Friday by the BLS.

Separately, for the seventh straight month, the BLS acknowledged continued misclassification of some “unemployed” persons as “employed,” in the Household Survey. An estimated “upside limit” of 773,000 persons were indicated as “employed,” who more properly should have been counted as “unemployed,” reducing a potential September 2020 U.3 headline unemployment rate of 8.3% to the published 7.9% (7.86%). That was down from a similarly distorted headline U-3 unemployment rate of 8.42% in August. Headline September U-6 declined to 12.84% from 14.24%, with the headline September ShadowStats Alternate Measure -- moving on top of U.6 -- at 26.9%, down from 28.0% in August.

Editor’s Note:

The U-3 unemployment rate represents the number of people actively seeking a job in the U.S. The U-6 unemployment rate also includes discouraged, underemployed, and unemployed workers in the country.

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Declining Federal Stimulus Payments & Reduced 4^th Quarter GDP Forecast:

Bank of America Research notes that U.S. Stimulus Payments are the lowest since April. The investment bank identifies five state elections which they believe will determine the majority in the Senate in 2021. This is show in the following two charts.

Chart 1. Federal stimulus payments are the lowest since April - Treasury withdrawals for unemployment insurance payments, $mn

SOURCE: BofA Research Investment Committee, Bloomberg

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Chart 2. 5 races will decide control of the Senate and the future of fiscal policy - 2020 Senate election consensus forecasts

SOURCE: BofA Research Investment Committee, Cook Political Report, Sabato's Crystal Ball, Inside Elections

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Separately, Morgan Stanley slashed its forecast for US gross domestic product growth in the 4^th quarter to 3.5% from 9.3%, citing "diminishing fiscal support" in a Sunday note to clients. A team of Morgan Stanley economists said that a second stimulus package is "unlikely to be delivered this year." They also noted that a divided government after the election means more "fiscal gridlock" is ahead for the U.S. economy.

Conclusions:

Friday’s employment report was the last set of monthly jobs numbers - and one of the last major pieces of economic data - before the presidential election on Nov. 3^rd. There’s tremendous uncertainty for the remainder of the election campaign due to President Trump suffering from COVID-19. Also, the uncertainty of GOP Senate leaders trying to gain confirmation of the Amy Coney Barrett Supreme Court nomination despite the news that at least three Republican Senators have tested positive for the coronavirus and more are quarantining after likely exposure.

Meanwhile, the BEA will publish its initial estimate of third-quarter GDP on Oct. 29^th. No matter how large the number is (annualized or not), it won’t tell us much about the sustainability of the economic recovery or the amount of time it will take to return to pre-pandemic levels. That will largely depend on containing the virus, having a vaccine that has been thoroughly tested as safe and effective, and the U.S. election results.

Classic Quote:

When pondering the uncertain economic and coronavirus outlook for the 4^th Quarter and all of 2021, keep in mind what Brooklyn Dodgers fans of the early 1950s and New York Met fans of the 1960’s said after the end of each baseball season:

“Wait till next year...”

Good health, good luck and till next time…

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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