“An anniversary is where you look back at having either fulfilled Cinderella or Lord of the Flies.” – Fernando A. Torres, author
One year into recession, we should take a step back and take stock of where we stand, and Friday’s jobs report provides a place to start. March showed the largest monthly gain in payrolls since last August, with 916,000 net jobs created (as well as 156,000 additional jobs added to the January and February reports upon revision). The Diffusion Index, which measures the share of sectors increasing payroll, also has shown a strong rebound in 2021. The share of sectors adding jobs is back to the second-highest mark since the recession hit. This is really good!
Conditions are improving as vaccinations increase, right on time. But the cumulative damage from the past year is still substantial, as seen in the graph below. Comparing the current decline in jobs across industries after one year in recession with the previous recession is a useful analysis. The first thing that jumps out is that, unlike in 2008, not a single sector gained employment over the first year of the recession.
This is a bit surprising at first. Usually you see a few sectors still doing OK one year after the start of a recession. But we think this gives us an indicator of the underlying strength in the labor market outside of the hardest hit sectors. Or, should we say, lack of strength. The big job gains we are seeing are great, but those gains are really making up for the temporary layoffs and furloughs. There seems to be little economic momentum in other industries, and that raises the question of where exactly we will be once everyone is fully vaccinated. The next leg of the recovery starts with dropping social-distancing practices post-vaccine, but confidence in the economy to grow once we’ve recovered to pre-COVID levels will require more than just a boom in in-person spending and a return to bars and restaurants and hotels.
Although that will help! The next thing that pops out in the graph above is that shocking 25% gap still missing in the arts, entertainment and recreation industry. This far outpaces the weakest sector at this point in 2008, construction, which was also outdone by losses in the accommodation and food service sector over the last year. As we all can recite in our sleep right now, an airborne pandemic means in-person activities are extremely difficult, and these sectors won’t get back to normal until everyone is completely comfortable in close proximity to others once again. That day is approaching, but rehiring one quarter of employees will still take some time.
The one major positive is how the “contagion” appears limited compared to the 2008 recession. As fiscal and monetary stimulus was limited in 2007-08 compared to 2020-21, the fallout from overleveraged households and financial institutions took years upon years to sort itself out. This is why construction payrolls to this day have not returned to their 2006 peak. Due to the various household cash injections, expanded unemployment insurance, a quick-acting Federal Reserve to offer various liquidity programs, and, perhaps most importantly, forgivable Payroll Protection Program loans, such stagnation is unlikely this time around. The recovery in this recession’s hardest hit sector should be much quicker.
Construction’s slow death — it took five years before the job losses finally stopped — showed how arduous the recovery was last time around. While leisure and hospitality’s initial drawdown was much more severe, it was for an exogenous reason that should be mostly solved in a few months (quarters?). While we won’t downplay the pain facing thousands upon thousands of restaurateurs and hoteliers across the country, the fact that they are able to now rehire hundreds of thousands of employees each month is incredibly encouraging. As of March, 647,000 more employees were working in this sector than at the end of 2020.
Of course, millions more are waiting. But what was once looking like the worst and most difficult recession on record has become much more manageable. One of our long-running fears was that a more “traditional” recession, one with permanent job losses, was forming underneath the very nontraditional recession during 2020. We’ve been using the chart below to track that possibility. As of fall 2020, nearly 3 million workers had already been permanently laid off, a record pace compared to the prior seven recessions. Since then, however, this figure has fallen by over half of a million. Declines in permanent layoffs generally take several years into a recession to happen, another sign of the benefits to responsive fiscal and monetary policy.
We hope this trend continues, and see no reason for it not to over the coming months as more and more locations reopen. What the economic prospects will look like after the reopenings occur is more uncertain, but at least we are taking the easy wins where we can find them. The hope is that these gains in getting people back to work in the hardest hit sectors, along with the massive pent-up household savings, will be enough to jump-start economic activity across all industries.
The Week Ahead …
This week kicks off with the Institute for Supply Management's Services Index, a measure of business activity in March. The manufacturing version, released last week, recorded rapid gains in activity for the sector in March, as production showed the broadest increase among respondents since January 2004. A strong number is expected for the services report, as well.
Elsewhere, the Federal Open Market Committee is scheduled to release minutes from its March meeting. This will likely reveal some underlying disagreements among members over the conditions needed to begin reducing stimulus. Chairman Jerome Powell has a firm grip over the decision-making, and backing from policy-minded Vice Chair Richard Clarida and Governor Lael Brainard in doing so. But there does appear to be more internal dissent building among regional Fed presidents, as seen in the widening dispersion in their projections for a future federal funds target rate.