• The Hidden Recession

    The Hidden Recession Forming After the Lockdowns

    The Hidden Recession Forming After the Lockdowns

    “When we fight upstream against a rocky undercurrent, every foothold takes on a kind of urgency.”
    -Arthur Golden, author of "Memoirs of a Geisha"

    Friday was the last nonfarm payroll report before the election. The Bureau of Labor Statistics reported a gain of 661,000 jobs in September, down from a gain of 1.5 million jobs in August and a peak of 4.8 million jobs gained in June.
    The pace of recovery is clearly slowing. At the current pace, it will take another 16 months to recover the remaining 10.7 million jobs lost since February. The troubling thing is we don’t think it’s that simple.

    It’s becoming more and more clear that there are two recessions happening concurrently, both moving in different directions. The unique lockdown recession that greatly affected restaurant and retail workers is in recovery as the rehiring of furloughed employees continues as cities reopen. But a more traditional recession seems to just now be getting underway, as permanent layoffs continue to rise.

    Permanent job loss rose yet again in September, with 345,000 newly unemployed on a nontemporary basis.

    The chart below shows permanent job losses as a percentage of the labor force, placing the current recession in the context of seven prior recessions. It appears that the second, more traditional-looking recession is just getting started. And more quickly than any we’ve seen in the post-war period.


    Over two times as many workers have been permanently displaced since the recession started as when it began, an unprecedented pace of dislocation. Put another way, if every temporarily unemployed worker was rehired immediately, payrolls would still be 6 million below their February peak.

    Another way to see these two dueling recessions is to look at the movement of workers from employed to unemployed, and vice versa. The chart below shows total flows between these two buckets Essentially, the two series net out to give us the change in total employment. The chart below shows what the headlines miss in the 661,000 jobs gained in September. While more workers gained employment than lost it, 7.1 million went from being employed to being unemployed (the blue line). Pre-COVID, this would have been a record number of people losing their jobs in a month, eclipsing the financial crisis record of 6.8 million jobs lost in a month.

    It should also be noted that the number of workers going from being unemployed to employed each month (the red line) is falling quickly from the early months of the recovery. Are we going to see these two lines cross in the coming months? Will the traditional recession forming overcome the recovery of the unique lockdown recession?

    Another worrisome detail in Friday’s labor market report was the concerning trend in the labor force participation rate, which rolled over in September, now down a full two percentage points since the recession began.

    The drop has been primarily due to a lower share of 25-54-year-old women working, a fact we can likely attribute to greater child care responsibilities with schools not fully functioning. This cohort’s participation in the labor force has fallen nearly three percentage points since January, compared to about half of that drop for men.

    The now biweekly "Household Pulse Survey" sheds some light on this. After taking a month off due to lack of funding, the survey is back. One of the questions deals with why people aren’t working. In the most recent survey, 11% of the nonretired population stated that they can’t work due to child care, compared to 7% in early May. Child care has now overtaken temporary business closings as a reason for unemployment.

    As it turns out, 865,000 women aged 20 and above left the labor force in September alone, now totaling 2.7 million fewer working women than when the pandemic first hit.

    The complications facing the rest of the recovery are, well, more complicated. The gains we’ve seen so far have been “easy”: operating at moderate capacity is a big gain above not operating at all. But the longer the gap between moderate and full capacity looms, the more permanent issues arise.

    The deeper into the year we get, the more difficult major job gains will be to come by without an antivirus. We did see some improvement in the most impacted industries, as businesses seem to be figuring out how to reopen safely, though at lower capacity. But those gains have leveled out sharply in recent months, leaving total employment in those industries well below pre-COVID levels.

    More troubling, a nascent COVID resurgence seems to be underway, threatening reopening plans across the country. The percentage of tests that have come back positive has stopped falling, and from what we see in the data from reservation service OpenTable on restaurant activity, the pace of restaurant reopening has slowed. As we’ve stated previously, the challenges will only increase as diners move indoors during winter. Beyond this, layoff announcements have been spiking, as Disney, Allstate, Goldman Sachs, American Airlines and United Airlines announced cuts last week.
    Perhaps we should stop referring to this as a K-shaped recovery and start talking about the Janus recession, named for the two-faced Roman god of beginnings, endings, duality, time and transitions.

    The Week Ahead …

    This week will surely be a whirlwind on the back of the announcement that President Trump has contracted coronavirus. As macro observers, we will be keenly watching Wednesday's release of the minutes for the September Federal Open Market Committee meeting. As the meeting unveiled a landmark shift in guidance around the Fed's policy approach, we expect discussion of the finer details to be revealed from the synopsis.

    Data releases slow, particularly after this morning's release of the Institute of Supply Management's report on economic activity in the services sector. Given the churn in the labor market discussed earlier, Tuesday's "Job Opening and Labor Turnover Survey" release for August should shed insight.
    We continue to focus on high frequency data, most notably the biweekly Household Pulse Survey and jobless claims figures, both scheduled to be released on Thursday.