Coronavirus Outbreak – the May Job Report was a Stunner

According to the Bureau of Labor Statistics, “total nonfarm payroll employment increased by 2.5 million in May, reflecting a limited resumption of economic activity that had been curtailed due to the coronavirus pandemic and efforts to contain it.” 

Economists were stunned by this turnaround in the employment picture as they were expecting that the non-farm payrolls would shed 8M jobs, pushing the May unemployment rate up to 19.5% from April's 13.3%.

So, what happened? How did they miss it so badly?

Here are some issues to ponder...

1. Data Accuracy -- These monthly employment numbers are from surveys, unlike the weekly jobless claims which are from actual filings, so they are almost mutually exclusive data points. We must remember that when a sudden structural change (e.g., the Coronavirus pandemic) happens overnight, surveys become less reliable in the short-run, returning to normalcy as the dust settles. Ideally, this monthly employment report (and the resulting metrics) should be keyed off the actual weekly jobless claims, without having to maintain two competing yet disconnected sets of data simultaneously. Of course, this is by design.

2. Pent-up Demand -- According to the report, most private sectors had job gains (or, at least, fewer losses than in April). Does it just reflect a one-time pent-up demand for manpower to participate in the re-opening, post pandemic? So, unanswered questions such as this make it too early to talk about a turnaround in the overall employment picture; in fact, this report perhaps proves it’s more of a "rush to" quantity than quality. 

3. PPP for Small Businesses --  This rush was further accentuated by the Payroll Protection Program (PPP) of the Treasury Dept., meaning the hiring was not necessarily tied to the business (demand) recovery. It imposed very restrictive requirements: In order to qualify for the loan forgiveness, employees had to be rehired/kept for at least eight weeks and and at least 75% of the loan had to be spent on payrolls within eight weeks of receiving the funds. Many businesses and economists have complained that the PPP was poorly designed. The businesses should have qualified for "forgivable" loans only to keep/hire back their own employees. Anecdotally, many businesses hired their own relatives and friends, claiming the laid-off employees were unavailable / unwilling to return. If these claims are true, the PPP was more than just poorly designed, perhaps a disaster.

Of course, as of today (6/5), the revised guidelines have significantly relaxed most of those stringent requirements. Hopefully, the future job reports will start to show the economic relationship between the business recovery and proper manpower planning.

4. Hiring and Firing -- The biggest job loss in today’s report was in Government (-585K), followed by Information Technology (-38K) –- the two more long-term and better-paying sectors. Conversely, the biggest job gain (+1.2M) was in the “Leisure and Hospitality” sector, which seems to suggest that the industry is ready to conduct a quick experiment to test out two market issues: (a) level of consumer enthusiasm (large and steady flow of customers are needed) and (b) availability of manpower (very labor-intensive industry). Once this quick experiment is over, the June/July reports will show us the results, leading to better understanding of the level of stability in the industry.

5. Volatility in Stock Market (an alternative perspective) -- The stock market is not the leading indicator of the economy anymore (that's now an old economic theory). It has been taken over by the algorithm-driven program trading (Math/AI models), controlled by 20-30 major financial services companies (hedge fund, brokerage, private equity, etc.). These models decide the daily swings of the market. When the models are in tandem, the market generally stays up all day long (as was the case today); when they conflict, some wild swings come into play. Obviously, the central news and events are heavily weighted in those models. Of course, while the other professional day traders play along with the trend, they hardly influence the direction of the market anymore, contrary to the conventional wisdom or belief.

Also, another misconception is that hedge fund managers are perennially on the short side of the market; for instance, if the hedge fund managers were shorting the market in April and May, they would have folded by now. They did when the Dow went down to 18K in March and then they reversed direction and went "long." Once we retest the old highs, they may short the market again. People must realize that the hedge fund managers use very sophisticated math models (case in point: Dr. Jim Simons was a math professor before starting Renaissance, one of the largest and most successful hedge funds).

Anyway, this job report was wonderful and we'll embrace it with open arms.

Stay safe!

-Sid Som
homequant@gmail.com