Global| Jul 02 2020The Economic "Bounce" Is In: What's Next?
|in:Viewpoints
Summary
Both the employment report and the Institute of Supply Management (ISM) survey of manufacturers for June show a strong "bounce" in jobs and new orders from very depressed levels. The financial markets view the data as another sign of [...]
Both the employment report and the Institute of Supply Management (ISM) survey of manufacturers for June show a strong "bounce" in jobs and new orders from very depressed levels. The financial markets view the data as another sign of the economy slowly returning to pre-pandemic levels. But the continued high levels of jobless claims and fast rebound in COVID cases to record highs raises doubts on the sustainability while also placing a "lower" ceiling on the scale on the bounce.
In June, payroll employment rose 4.8 million, well above consensus estimates, following a gain of 2.7 million in May and a record loss of 20.7 million in April. The "bounce" in jobs was broad-based as 75% of private industries added people to their payrolls in June. That compares to a record low of 4% in April.
Sixty percent of the job gains in June were centered in retail trade and leisure and hospitality industries, the two sectors of the economy that were badly hurt by government restrictions on travel and social and recreational gatherings.
The civilian unemployment rate of 11.1% in June was off 2.2 percentage points from the level in May. The household employment survey showed 4.9 million people found employment in June. But questions over the accuracy of the household employment data, especially the reported unemployment rate, still linger.
According to the Bureau of Labor Statistics (BLS), the number of households who responded to the survey in June came in at 65%, lower than the 67% in May, and 70% in April. A "normal" response rate is around 83%. BLS maintains that they were "still able to obtain estimates that met our standards for accuracy and reliability". But the potential error in the data has to be larger when the sample size is dramatically less than normal.
The ISM manufacturing survey in June posted a strong bounce of roughly 10 percentage points to 52.6, the highest monthly reading since April 2019. A record 25 percentage point jump to 56.4 in the new orders index was largely responsible for strong "bounce" in the ISM composite index.
The ISM index is a diffusion index. One of the shortcomings of a diffusion index is that it does not distinguish between the scales of gains and declines. For example, in June 37% of the respondents reported higher new orders, 39% said orders were unchanged, and 23% reported lower orders. Given the depressed level of order bookings, it is surprising that more firms reported no improvement in orders versus those that reported gains.
Taken together, June reports on jobs and manufacturing do show a bounce in economic activity, but from very depressed levels. Hours worked for production and non-supervisory workers contracted a record 45% annualized in Q2. That points to a record fall in GDP, wage and salary income, and operating profits, the latter of which is being overlooked or ignored by equity investors.
Also, the path forward is still filled with potholes and downside risks. The 1.5 million in new jobless claims in the latest week indicates the rebound in jobs is a bounce and nothing more. Also, the number of new COVID cases rising to a new record of 50,000 for a single day raises the odds of more layoffs as states force businesses to pause or reverse course in their reopening plans.
The equity market is priced for a "pandemic-free" economy. But pandemics are not solved by equity market recoveries but instead by medical science ability to find a cure. As such, equity investors should not expect the "good" news in the June data to continue as long as the pandemic remains unresolved.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.