Submitted by Joe Carson, former chief economist at Alliance Bernstein
Both the employment report and the Institute of Supply Management (ISM) survey of manufacturers for June show a strong “bounce” in jobs and new orders from very depressed levels. The financial markets view the data as another sign of the economy slowly returning to pre-pandemic levels. But the continued high levels of jobless claims and fast rebound in COVID cases to record highs raises doubts on the sustainability while also placing a “lower” ceiling on the scale on the bounce.
In June, payroll employment rose 4.8 million, well above consensus estimates, following a gain of 2.7 million in May and a record loss of 20.7 million in April. The “bounce” in jobs was broad-based as 75% of private industries added people to their payrolls in June. That compares to a record low of 4% in April.
Sixty percent of the job gains in June were centered in retail trade and leisure and hospitality industries, the two sectors of the economy that were badly hurt by government restrictions on travel and social and recreational gatherings.
The civilian unemployment rate of 11.1% in June was off 2.2 percentage points from the level in May. The household employment survey showed 4.9 million people found employment in June. But questions over the accuracy of the household employment data, especially the reported unemployment rate, still linger.
According to the Bureau of Labor Statistics (BLS), the number of households who responded to the survey in June came in at 65%, lower than the 67% in May, and 70% in April. A “normal” response rate is around 83%. BLS maintains that they were “still able to obtain estimates that met our standards for accuracy and reliability”. But the potential error in the data has to be larger when the sample size is dramatically less than normal.
The ISM manufacturing survey in June posted a strong bounce of roughly 10 percentage points to 52.6, the highest monthly reading since April 2019. A record 25 percentage point jump to 56.4 in the new orders index was largely responsible for strong “bounce” in the ISM composite index.
The ISM index is a diffusion index. One of the shortcomings of a diffusion index is that it does not distinguish between the scales of gains and declines. For example, in June 37% of the respondents reported higher new orders, 39% said orders were unchanged, and 23% reported lower orders. Given the depressed level of order bookings, it is surprising that more firms reported no improvement in orders versus those that reported gains.
Taken together, June reports on jobs and manufacturing do show a bounce in economic activity, but from very depressed levels. Hours worked for production and non-supervisory workers contracted a record 45% annualized in Q2. That points to a record fall in GDP, wage and salary income, and operating profits, the latter of which is being overlooked or ignored by equity investors.
Also, the path forward is still filled with potholes and downside risks. The 1.5 million in new jobless claims in the latest week indicates the rebound in jobs is a bounce and nothing more. Also, the number of new COVID cases rising to a new record of 50,000 for a single day raises the odds of more layoffs as states force businesses to pause or reverse course in their reopening plans.
The equity market is priced for a "pandemic-free" economy. But pandemics are not solved by equity market recoveries but instead by medical science ability to find a cure. As such, equity investors should not expect the "good" news in the June data to continue as long as the pandemic remains unresolved.