An astonishing pickup in payrolls during May has rekindled hopes that the economic slump may not be nearly as bad as it looked and could soon give way to an exodus of workers back to their jobs and a sharp broader recovery.
Where Wall Street economists were looking for a nonfarm payrolls loss of around 8 million, the month actually saw a gain of 2.5 million. The estimated unemployment rate was 19.5%, which would have been the nation’s worst since the Great Depression era. Instead, the number came in at 13.3% which is still well clear of anything the U.S. has seen since World War II, but far better than the worst doom-and-gloom estimates.
Friday’s “report marks the beginning of the labor market recovery in our view, and we expect the unemployment rate to fall further in June,” Jan Hatzius, chief economist at Goldman Sachs, said in a note. Hatzius added that Goldman is reviewing its projections for unemployment, which it had anticipated topping out at 15% this year.
Hatzius had been looking for a decline of 7.25 million from May, but he was far from alone in whiffing on the jobs picture. Now, economists are looking at a completely different picture and starting to see an entirely different jobs market from the one eviscerated by the coronavirus.
The data now “suggests May job gains are only the beginning here,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “The recovery path there suggests a June payroll print at north of 10 million is a reasonable starting point for the conversation.”
If that number is anywhere accurate, it would suggest a staggering turnaround and get economists talking again about a possible V-shaped recovery off what is potentially the shortest recession in U.S. history. Ryan Detrick, senior market strategist at LPL Financial, wondered in a tweet whether “the recession [lasted] only two months.”
If that’s the case, and the jobs market and perhaps the broader economy see a V recovery, a three-headed bull is likely the cause and will help justify the stock market’s stubborn resolve.
First, government funding helped mitigate a wave of layoffs that otherwise would have come with stay-at-home orders related to the coronavirus. Then, states and cities reopened more quickly than anticipated. Finally, the U.S. economy, which seemed to wobble even before the shutdown, showed an uncanny sense of resilience that gave still another boost to an uncanny Wall Street rally that seemed to defy fundamentals.
“The stock market had it right the whole time,” said Mitchell Goldberg, head of ClientFirst Strategy. “The stock market had a record plunge from a peak into a bear market and it had a record exit, which just reinforced the V-shaped narrative.”
Good news, but lots of work ahead
Friday’s nonfarm payrolls report is quite likely the biggest surprise relative to expectations that the market has ever seen.
To be sure, though, May is just one month, and the data was noisy.
The Bureau of Labor Statistics noted continuing counting discrepancies where workers were considered employed but not at work for “other reasons.” Including them as unemployed would have pushed the jobless rate up to 16.4%, though doing so also would have driven April’s 14.7% up by even more as well and made May look like a bigger drop.
The job gains also represent just a fraction of those lost. With social distance guidelines remaining in place even at a modified level, the pace of rehires is uncertain.
But there are positive economic signals coming from beyond the jobs market.
Housing purchases and vehicle sales are two strong bellwether signals that showed significant improvement in data released earlier this week. The Citi Economic Surprise Index, which measures data compared to estimates, went positive Wednesday and is now at its highest level in two months, shortly after the economic shutdown.
That’s part of a growing positive feel among employers and job seekers, according to Amy Glaser, senior vice president at Adecco USA, a leading recruitment and workforce solutions firm.
“We saw the rock bottom about five weeks ago then we saw a steady increase week over week up until this week,” Glaser said. “We’ve seen an explosion in activity, which is very encouraging and very exciting.”
Government loan program looms large
Getting organic job growth will be particularly important as the Payroll Protection Program, which provided money to companies in exchange for keeping workers on payroll, runs its course. Pending a signature from President Donald Trump, the terms of the PPP loans will be extended, though not beyond the end of 2020.
The program, which also provides extended unemployment benefits, has pushed $800 billion “out the door,” according to estimates from Krishna Guha, head of global policy and central bank strategy for Evercore ISI. The Treasury Department said earlier this week that some $267 billion alone has been disbursed through payments to individuals and households.
And none of that counts the help from the Federal Reserve, which slashed interest rates and has provided liquidity and loans in programs that could stretch into trillions of dollars.
Guha estimates that PPP borrowers account for 50 million jobs, so if even a fraction of those are preserved, the program would provide a substantial boost to employment.
“If the jobs surprise is being driven by one-time payments like one-time stimulus checks, then the impulse will be gone over the next couple of months and employment gains may slow again (or even decline if fiscal cliffs result in a sudden stop to income support),” Guha said. “If instead we are in the early phases of a more sustained recovery of consumption potentially supported by more extended fiscal support under a future stimulus four, the rehiring effects of PPP might prove more durable.”
For the markets, a rally that saw the Dow Jones Industrial Average gain as much as 1,000 points Friday remains in the balance.
Amid a global downturn that is likely to see second-quarter gross domestic product fall 40% or more, with nearly 21 million people still on the unemployment line, the market has been beyond resilient. The S&P 500 is edging towards positive territory for the year.
“Equity markets are always anticipatory mechanisms. Investors are always looking down the road 12 months, 18 months later. The rally we’ve seen was the market anticipating a rebound maybe not all way to previous levels, but at least a recovery in activity,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. “That seems to be coming more quickly than what anybody anticipated.”
