The US Labour Market in the Great Suppression

Employment will be a leading indicator of the downturn and a lagging indicator of recovery

Wednesday and Friday will see the release of some data on the US labour market for March. These data will only hint at the damage the pandemic is inflicting on US employment because they were collected the week of 9-13 March, the week before initial jobless claims started to rise and two weeks before the 3.2 million surge in initial jobless claims for the week of 21 March that was reported last Thursday.

The ADP employment survey to be reported tonight has economists expecting a 200k decline in employment. The ADP survey is often used as a partial indicator for the non-farm payrolls survey released Friday. While they are highly correlated historically, the ADP survey is somewhat over-fitted to the historical official employment data and so often has only a loose fit for the most recent month’s non-farm payrolls report.

The non-farm payrolls report Friday has economists expecting a 100k decline in employment, with the unemployment rate expected to rise from 3.5% to 3.8%. Hours worked are expected to show a substantial decline as businesses started to shut down.

While the starting point for the US labour market going into the pandemic is the strongest in many years, the forthcoming collapse in employment and rise in the unemployment rate will be unprecedented in speed and quite possibly in magnitude. Last week’s release of initial jobless claims for the week of 21 March broke all previous records.

Thursday’s release for the week of 28 March is expected to see a further 2.9 million claims, based on surveys of economists. However, the binary options on the initial claims data traded on the North American Derivatives Exchange imply a 55% chance of a number in excess of 4 million and a 25% chance of a number in excess of 5 million.

Needless to say, these are catastrophic numbers, which could ultimately see a double-digit unemployment rate in excess of the peak seen in the wake of the global financial crisis. The key issue for the labour market, however, will not be the magnitude of the increase in unemployment, which is now largely set in stone, but the duration. Ultimately, the US economy will be hostage to the success or otherwise of pandemic control.

If the pandemic can be contained in the next few months, the recovery in the economy is likely to be as rapid as the downturn. However, economic downturns have highly persistent effects on the labour market. While employment will serve as a more timely and leading indicator of the downturn in activity, it will be a lagging indicator of the recovery.