The Nascent Labor Market Recovery

The May ADP report was a shocker, but not for us...

This morning’s May ADP employment report showed a 2.76 million decline, far fewer than the consensus forecast of 9.0 million. This is consistent with the second section of our report on Saturday, consequently we are republishing that section and making it available to both free and paid subscribers ahead of Friday’s May employment report from the Bureau of Labor Statistics.

On Friday, the Bureau of Labor Statistics (BLS) will release the May employment situation report. Recent incoming data hints that by June, total payrolls may turn positive, albeit following the sharpest decline since the Great Depression. The trajectory of the recovery is critical, reports this week on jobless claims and the Conference Board’s May survey pointed to a much quicker than consensus rebound. From mid-March through mid-May, there was an increase of 36.8 million initial jobless claims from the February baseline of 210,000 per week. This is the number that grabs the headlines; however, adjusted continuing claims are 17.4 million lower than the cumulative increase in initial claims. In the latest reporting week they declined by 4.9 million while consensus expected a 600,000 increase. Additionally there have been reports that ~2/3’s of workers on unemployment insurance have seen their incomes increase due to the expansion of eligibility (notably the Gig economy) and benefits. The spread between initial and continuing claims implies there is considerably more hiring than the 38 million newly unemployed narrative would lead you to believe.

Figure 1: Last week’s sharp drop in continuing claims was the most encouraging economic indicator since the crisis began in March.

The Conference Board’s May consumer confidence survey was another positive labor market data point in that the labor differential - respondents describing jobs as plentiful less those who described jobs as hard to get - improved to -10.4% from -15.7% and +32.6% in February. While the drop appears significant, the relationship with this survey and the BLS household survey that derives the U3 unemployment rate has been exceptionally strong and the current reading is consistent with a 6% unemployment rate. Additional evidence of labor market dynamism includes:

1) The jobs openings and labor turnover survey (JOLTS) report of 5 million hires in March.

2) The large majority of newly unemployed responding to the April BLS special question that they believed their status was temporary.

3) The much sharper drop in employment to population relative to participation rates that implied the majority of the new claimants were not looking for work.

Taken together, it looks to us like workers themselves believe the unemployment rate will drop well below double digits in the months following the end of Covid-19 shutdowns. To be sure, the damage from these draconian policies could prove greater than workers believe; however, we have long believed labor market dynamism is vastly misunderstood. In the near term this implies consensus will be too pessimistic for an 8 million decline in Friday’s May Employment report. In another month the expiration of expanded unemployment benefits occurs right about the time when June payrolls are likely to turn positive, providing a test of whether public policy is supportive of, or counterproductive to, the private sector.

Figure 2: The relationship between unemployment rate and Conference Board survey has been remarkably stable since the late ‘90s, the improvement in May implies the majority of newly unemployed believe they either have a job to go back to or will not have an issue finding them. For now, we are going to give the benefit of the doubt to the workers rather than economists.

One additional note on ADP; the majority of the job losses in April and May have come from the least dynamic portion of the labor market by size, that is companies of 1000+ employees. Small businesses are the highest turnover, most dynamic, the losses according to ADP have been smaller. This hints that the policy response, PPP is helping, but more to the point these businesses are accustomed to dealing with adversity and are far more resilient than most economists and market participants believe.

Figure 3: Worker reallocation is the quarterly sum of hiring and separations, both voluntary and involuntary, expressed as a percent of the labor force. For the total private sector reallocation was 25% prior to the Covid Crisis. This chart breaks out turnover by firm size, large companies tend to contribute the least to labor market dynamism. The ADP report shows nearly twice as many job losses in large companies as small ones. This is consistent with our view that the US economy is far more dynamic and resilient than most market participants believe.

Barry C. Knapp

Managing Partner

Ironsides Macroeconomics LLC



Reading List

“Showdown at Gucci Gulch, Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform”, Jeffrey H. Birnbaum and Alan S. Murray

“A Great Leap Forward, 1930s Depression and US Economic Growth”, Alexander J. Field

“1493, Uncovering the New World Columbus Created”, Charles C. Mann

“Great Society, A New History”, Amity Shlaes

“The Second Machine Age”, Erik Brynjolofsson, Andrew McAfee

“Grand Pursuit, the Story of Economic Genius”, Sylvia Nasar

“The Rise and Fall of the Great Powers”, Paul Kennedy

“Capitalism in America, A History”, Alan Greenspan & Adrian Woolridge

“Diversity Explosion, How New Racial Demographics are Remaking America”, William H. Frey

“Clashing Over Commerce, A History of US Trade Policy”, Douglas A. Irwin

“Destined for War, Can America and China Escape Thucydides’s Trap”, Graham Allison

“The Constitution of Liberty”, F.A. Hayek

“Judgement in Moscow, Soviet Crimes and Western Complicity”, Vladimir Bukovsky

“1931, Debt, Crisis and the Rise of Hitler”, Tobias Straumann

My next book: “Nudge”, Richard H. Thaler & Cass R. Sunstein

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