There is no doubt that we are witnessing historic job losses resulting from the Covid-19 pandemic crisis.
Non-farm payrolls fell by a combined 21.4 million in March and April, according to the U.S. Department of Labor. At the end of May, we were hearing estimates that close to 40 million Americans would be out of jobs and unemployment rates would be 20%+.
However, in May, actual non-farm payrolls rose by 2.5 million and the jobless rate declined to 13.3%, far better than expected and shocking everyone. May's figures indicated that a recovery was well on its way.
The range of numbers from various institutions have been so wide that even the ADP private payrolls, which initially showed a loss of 2.76 million jobs in May, just last week were revised up to a gain of 3.065 million. That is a huge reversal from the initial estimate. ADP also reported June private payrolls rose by 2.369 million, slightly below the economists average forecast surveyed of 2.5 million people.
On Thursday, June non-farm payrolls numbers surprised the market even more, coming in at 4.767 million jobs added, above the 3.058 million expected.
What exactly is happening and does this suggest a V-shaped recovery?
The numbers had been very pessimistic. Initial assessments also need to be taken with a grain of salt as expanded eligibility and enhanced unemployment benefits of $600/week encouraged more and more Americans to apply.
There is also likely some double counting in the past 10 weeks. An applicant might have applied again after an initial denial, while some may have been recalled and then let go of a job. Regardless, taking the three-month average, there are still 20+ million Americans who lost their jobs, and many of these will not be coming back. The immediate lockdown and reopening has helped the growth, but there has been a paradigm shift in the job market.
Despite the massive headline beat on Thursday, we had another week of higher continuing claims, at 19.29 million vs. 19 million expected. However, the percentage of those unemployed classified as not on a temporary layoff also increased, rising by 588,000 to 2.9 million in June. This adds to the increasing theme of permanent job losses, not just temporary layoffs, and has great relevance for the V-shaped recovery we are supposedly seeing.
If 20+ million jobs do not come back anytime soon, then how is consumer spending supposed to grow, adding to U.S. governments' net receivables? If a growing number of businesses are closing down, not just taking loans, then where is all that investment and capex spending the Fed so desperately needs to generate GDP growth?
The Fed has done a remarkable job of printing trillions to boost the markets, and inflating asset prices. That is the only thing in its direct control it can do -- hoping that a higher stock market will lead to higher 401(k)s and net investment worth for consumers. But the stock market is not the economy.
The Fed needs to rethink its policy measures and the government perhaps do away with the unemployment benefit schemes that incentivize people to stay home, claim benefits and even day trade.
Unfortunately, the Fed cannot print jobs. Whether some companies should be allowed to fail is a debate for another time, as more and more zombie companies will not hire people and increase productivity. And surely, not all are too big to fail.
Given the sudden shock that emerged back in March, the Fed, petrified of seeing a repeat of the fourth quarter in 2018 and 2008, just went all in and printed close to $7 trillion via buying assets in addition to the Treasury's fiscal stimulus schemes. Liquidity is a good thing, but too much can be a cause for concern especially if the world is slowly coming back post lockdowns.
The world will never be the same again, but it will not be shut down either. If there was genuine recovery in May and June, there is concern that the Fed did too much and too soon. But it is also stuck between a rock and a hard place, as it knows fully well. It can never withdraw this excess liquidity or normalize its balance sheet back down because every time it did, the markets could not handle even a small curtailment.
This is a beast that has been in the making for the past decade and now it is too big to be starved before it eats its owner. The beast can only be fed, not have its plate taken away.
When this all stops is anyone's guess, but for now the show goes on. The Fed would have been better to start off slowly so it had more room to print and add when necessary. Now if another problem arises, we will need multiples of what has just been done and a trillion will just become another number.
Maybe "gazillion" will become an official term?
