• A Bumpy Start to a New Year

    A Bumpy Start to a New Year

    A Bumpy Start to a New Year

    “Crippled and crazy, we hobble toward the finish line, pen in hand.”
    -Siri Hustvedt, American novelist and essayist
    That’s basically how we approach our deadline each week. Just ask our wonderful editors.

    This week was particularly challenging. There is always plenty to think about when new jobs data is released, and pairing that with new record COVID deaths and the U.S. Capitol building being overrun for the first time in over 200 years … well, it can be hard to pull a narrative together.

    Let’s focus on that jobs data.

    Eight months into recovery, the labor market is slowing again. As we hinted might be possible, job growth turned negative in December as 140,000 jobs were lost. As we close out 2020, there remains over 9 million fewer workers employed than a year ago. The pace of gains had been steadily declining in recent months (in red below), and the decline in the hiring diffusion index (in blue) indicates that fewer and fewer industries were hiring. It’s only our second week of 2021 and already we’re having problems with charts. Note how hard it is to see if the 140,000 job loss is actually negative (and that’s a pretty big number!).

    A double-dip back into negative territory isn’t that uncommon during an economic recovery. For comparison’s sake, job gains in 2010 after the Great Recession were commonly followed by negative prints before eventually stabilizing to 113 straight months of positive hiring.

    But it’s impossible to find a true precedent for the current downturn. It’s no mystery why conditions slowed: COVID cases surged as the year came to a close. Last week was the deadliest on record, with records also being set for the number of people hospitalized. The virus is still the most significant factor in the economy, and not even close.

    The hardest-hit sectors of the labor market are those jobs that cannot be done from home. Jobs in the leisure and hospitality, food and beverage, and entertainment sectors were hardest hit by losses in December. Breaking out job losses by industry based on the percentage of jobs that can be done at home, the split by work-from-home capability was clear in December. The least capable sector, accommodation and food services, saw a 400,000 drop in the single month. While the in-person work sectors have clearly rolled over, the more insulated sectors have been steady in recent months. In particular, goods-producing industries and the business sector continued to add jobs at a healthy clip in December.

    While this is good news for jobs where people can work from home, there remains a 4% gap from peak employment in both of those sectors. But the fact that these sectors continued to gain even as new virus cases eclipsed all-time highs in the U.S. is encouraging. Remember back in March and April, during the initial COVID surge, when jobs were being lost across nearly every industry. We have also noted over the last several months the continued rise in permanent job loss even when the headlines were showing huge job gains. That trend reversed in December as well, with permanent job loss declining even as total nonfarm payrolls fell.

    The main difference seems to be our response to the virus. In the second quarter of 2020, huge swaths of the economy were completely shut down. That isn’t happening this time around, at least not to the same degree. The Institute for Supply Management’s reports on business showed manufacturing production growing at the fastest clip since January 2011, and service-sector activity increasing faster than its historical average.

    Perhaps no better sign of this was the Federal Reserve’s upgrade of its economic forecasts at the Dec. 15-16 meeting. In spite of the lack of virus containment at the time, the Fed was focused on the future, namely the vaccine rollout.

    “The positive vaccine news was seen as reducing downside risks over the medium term, and a number of participants saw risks to economic activity as more balanced than earlier,” wrote the Federal Open Market Committee in its minutes released last week. The biggest risk, committee members noted, that of no additional fiscal support, has also since been mostly resolved with the December stimulus agreement and “Blue Wave” of Democratic control of the White House, House and Senate, meaning less political entrenchment.

    After spending 2020 tracking the spread of the virus for CoStar Economy readers, we are delighted to show you a new chart. As of this writing, 6 million people in the U.S. have been vaccinated against COVID-19, which, though not without missteps, is hugely important for keeping sentiment afloat. Look for regular updates of vaccination data throughout the year via the chart below. As you can see, the vaccine rollout couldn’t come soon enough.

    The higher those red bars go, the more optimistic we become.
    As you can tell, if you’ve made it this far, there are many crosscurrents in the December labor market data. It’s good news that certain sectors have remained healthy despite the current, near-rampant spread of COVID. While it could have been worse, December’s slowing labor market in the worst-hit sectors is something policymakers and analysts should not gloss over. The number of workers who have been unemployed for over half a year, or else have given up looking for work completely, rose again in December and now stands at over 6 million people. This measure of “shadow slack” in the labor market will only rise in the coming months.

    Your authors have spent a lot of time talking about this metric. First, we should also be mindful not to ignore the enormous human and social costs of continued prolonged unemployment. The numbers on the axis in the chart above represent people. Full stop.

    What does rising shadow slack mean? On the one hand, it is not predictive of future economic and job growth. When shadow slack was hitting its peak in 2010, the economy was already in the early stage of a record-long economic expansion.

    However, this metric matters a great deal for monetary policy and interest rates. Despite years of strong job gains and a long list of indicators, such as the traditional Taylor Rule, suggesting that the Fed should have started hiking rates as early as 2013, the committee didn’t raise rates until the last days of 2015 and then went on hold for another full year. That’s 25 basis points of interest rate hikes in nearly eight years of expansion. Expect even more patience this time around.

    The Week Ahead …

    The data deluge continues this week, punctuated by December retail sales data released on Friday in conjunction with early 2021 consumer sentiment numbers from the University of Michigan. The virus surge to close the year likely meant less spending than usual for the holidays, but should consumer sentiment remain intact following new stimulus, that could imply better days ahead.
    Additionally, consumer price index data for December is set to be released on Wednesday, likely to continue to show divergences between items that can be purchased online versus in a store.

    The Fed will remain active, publishing its business contact anecdotes for December via a new Beige Book release, also on Wednesday, and again with a variety of Fed speeches planned throughout the week.