- Market Insights
- 6 mins
The recent jobs report contains eye-popping historic numbers and is further evidence that the economy is in recession. However, the fact that the sudden rise in unemployment is due to the nationwide lockdown is not only well understood, it is the defining characteristic of this economic crisis. Non-essential businesses have closed, demand has temporarily dried up, and many individuals have been laid off or furloughed as a result, creating financial hardship across the economy. What matters now for long-term investors are when and how the economy begins to reopen in the coming months.
The specific numbers in the jobs report show that changes in the labor market were extremely abrupt in April. While it's important to maintain perspective around these numbers given that they are backward-looking, it's useful to understand their magnitudes nonetheless.
Specifically, the data show that the unemployment rate jumped to 14.7% in April. It had risen to 4.4% in March from a 50-year-low of 3.5% in February. To put this in perspective, unemployment reached a high of 10% during the last recession before steadily falling over the next decade. The so-called under-employment rate, which better accounts for those who have dropped out of the labor force, jumped to 22.8%.
As recently as February, 192,000 new jobs were being created per month on average. In April alone, 20.5 million jobs were lost. When combined with March, payrolls have shrunk by 21.4 million, consistent with recent weekly jobless claims numbers. Compare this to the global financial crisis when 9 million jobs were destroyed during the entire period from 2008 to 2010. These job losses nearly offset the 22.7 million net jobs that were created during the most recent economic expansion.
It should be noted that there are some blips in the data due to the way they are defined and calculated. The labor force participation rate, which measures the percentage of the population engaged in the labor force - those that are either working or actively looking for work - plummeted. This is the result of being physically unable to pursue work, and for some, expecting to be recalled back to their jobs. This number should quickly recover as individuals begin to look for work again. A similar blip is present in the wage growth data due to the nature of recent layoffs.
With these and other facts in mind, it's important to focus on the bigger picture. First, many workers are still only temporarily unemployed - either officially furloughed or expected to return to work once businesses reopen. These workers are currently counted as unemployed, and their jobs are considered lost, in the data above. In theory, many of these workers are in a position to return to work quickly, which would reverse some of the April numbers. With only a couple months having passed, both worker skills and capital equipment can still be competitive.
Whether this happens will depend entirely on the manner and timing in which the economy is reopened. With each passing week, the likelihood that temporary layoffs become permanent increases. Additionally, if the economy is reopened in haste, the risk to public health could bring further shutdowns and other economic consequences down the road. This is a fine line that will need to be walked by government officials and business operators alike.
While there are reasons for optimism, it's unfortunately also the case that some jobs may be either permanently lost or slow to return - especially in industries such as restaurants, hospitality, travel, etc. There will no doubt be scars from this crisis that change consumer and business behavior. While it's no consolation in this moment, this is always true of recessions and economic crises. The economy, as a dynamic system, will evolve by re-allocating resources and creating jobs in other areas.
Second, and more importantly for long-term investors, the stock market's immediate reaction to these numbers was a positive one. This is because investors and economists had been expecting exactly these types of numbers or worse over the past couple of weeks. Not only are the root causes clearly understood, but data such as weekly jobless claims and yesterday's ADP payrolls report provided hints of what was to come.
Right or wrong, this is one reason the stock market has risen by over 30% since late March when focus shifted toward reopening the economy. Markets are forward-looking even as we are still adjusting to being stuck at home in our personal lives. It has always been the case that trying to time the bottom of a market is a difficult if not impossible exercise. Trying to do so in the middle of a fast-changing public health and economic crisis is no exception.
Luckily, for long-term investors who are focused on achieving financial goals over years and decades, it's not only unnecessary to try to time the market perfectly - but it might be counter-productive. While the jobs data above are historic in nature and may come to define this period, it is possible for the situation to improve in the coming months. Investors should focus not just on the immediate future, but on a how the economy will evolve over the coming quarters and years.
Below are three charts that help to put the jobs report in perspective.
1. Unemployment jumped to levels not seen since the Great Depression
Unemployment Rates
Find this chart under "Labor Market"
Unemployment spiked to historic levels in April. The unemployment rate of 14.7% eclipses the peak of 10% experienced during the height of the prior global financial crisis.
Many of these workers may be only temporarily unemployed. If this is the case, then there could be a recovery in these numbers as the economy slowly reopens.
2. Over 20 million jobs were lost in April
Total Jobs Created Since 2000
Find this chart under "Labor Market"
20.5 million jobs were lost in April, nearly matching the 22.7 million jobs created since 2010. Prior to this crisis, the economy had been creating an average of 192,000 jobs per month.
3. There are short-term blips in the job market data
Labor Force Participation
Find this chart under "Labor Market"
One blip in the numbers is the labor force participation rate. Due to the way this number is defined, it most likely didn't include temporarily laid-off workers and those who were physically unable to search for work in April. It's reasonable to expect this number to rebound in the coming months.
The bottom line? The jobs numbers, as historic as they are, were expected by economists and investors. It's important to focus on the light at the end of the tunnel, especially for those who are planning toward long-term financial goals.
