May Jobs: Curb Your Enthusiasm

Summary

• The May jobs report is both better and worse than it looks on the surface, but mostly worse.
• Though the data may be unreliable right now, the report showed a small recovery, with 1 out of 7 lost jobs returning. This is not yet V-shaped; curb your enthusiasm.
• One important indicator got better, but several others got worse. State and local government layoffs may become a wet blanket for recovery.
• Nominally, the largest losses had been in restaurants, which saw 26% of lost jobs returning. That other 74% is the biggest single chunk of unemployed remaining.
• Other services that rely on density and volume to make up for high fixed costs will also have trouble coming back.

CNBC, But Dumber Than Usual

You keep using that word, I do not think it means what you think it means.

This is an old trick of using changes instead of levels to make a recovery look better. Here’s the chart they should have shown:

Yes, a small bounce that brings us back to 2012 levels of employment. Nothing to be sad about, but still very, very bad.

Another way of looking at it is comparing the relative job losses with the last recession, until now the greatest economic calamity in my lifetime.

BLS. “NSA” = not seasonally adjusted

Or maybe you prefer the unemployment rate as a measurement?

BLS

Curb your enthusiasm.

Thought experiment:

• You have $100, but lose 80% in the market. You now have $20.
• But then your portfolio goes up 80%. Do you have $100 again? No, you only have $36. You have still lost $64.

This is simple arithmetic, something everyone seems incapable of right this moment.

One out of seven jobs returned in May, which is another way of saying six out of seven did not.

On top of that, our data is unusually terrible right now. Either BLS is really struggling with the circumstances, as they claim, or there is something worse going on, because the errors are all on the side of undercounting unemployment.

The Pandemic Unemployment Assistance (PUA) is being counted separately, at the bottom of the unemployment insurance (UI) tables. The current number is 11 million people receiving PUA and other non-UI benefits for the week ending May 16, the same week as the jobs report surveys were done. These overlap to some degree with regular UI claims, but to some degree, that 10 million is additive. We just don’t know.

BLS.

Complicating matters, the household survey, from where the headline unemployment rate comes, is really a mess right now. These surveys are normally done via in-person interviews, with plenty of staff at BLS HQ and local offices. None of this was true for the April or May surveys, and they had record low response rates in the 70s for both, normally in the 90s.

On top of that, BLS interviewers have made the same coding error two months in a row, classifying some unemployed as “absent from work for other reasons.” That it happened in April is understandable; that it happened again in May is suspicious. That all the errors are understating the true numbers is doubly suspicious.

So here are the “real” unemployment rates, but even they are probably wrong. By how much, and in what direction, we don’t know.

BLS

There was actually a bigger decline in the real unemployment rate than in the headline number without the errors added back in, since the error was smaller in May than April. Still, the number now is probably in the mid-high teens. Again, we just don’t really know because of how poor the data quality is right now.

Ironically, if they fix this in the June report, for which the surveys begin this week, the actual rate may come down, while the headline rate goes up. Maybe CNBC will report the error then. This is where we are.

But with what we have, let’s dig into the report and see where the bounce came from.

Why NSA?

Unlike most analysts, I have been using the not seasonally adjusted numbers since this all started. Why?

Under normal circumstances, the adjustments are important, because without them, every January and July would look like recessions.

I pulled out the recent action so you can see what a more normal 10-year period of NSA payrolls looks like.

But never has seasonality been less relevant. The adjustments are multiplicative, not additive, so they can be very large when we are dealing with large numbers like we are now. The adjustments in May are small, but earlier in this, adjusted initial UI claims were overcounting by 2 million in the first 2 weeks.

Also, I want the answer to the question, “How many Americans were employed in mid-May?” The not seasonally adjusted numbers answer that question, or at least try to.

Problem for a later date: the seasonal adjustments are based off previous years’ NSA numbers. They are going to have to come up with some way of adjusting the adjustments for all the highly unusual data coming through in 2020. If they don’t, Q2 2021 will look like the greatest economic miracle of all time, only to be crushed hard in Q3 and Q4.

The Household Survey

Again, take this part with a grain of salt, because this is where the big errors and low response rate were. I have adjusted the numbers where I could, but BLS only identified the errors as being about 5 pp in April and about 3 pp in May. Even they don’t know.

We’ve already seen the top-line number, about 16% unemployed adjusted for the error in May, but there are some key indicators I like to keep an eye on in the details. First, the participation rate:

This is the percentage of the working age population that has a job or tells interviewers they want one. I’m showing you that whole chart since 1965 so you can see the grand sweep of the trends. The rise from 1965-2000 is primarily due to women entering the workforce, but also to the population bubble of the Boomers aging in. But in 2000, the oldest boomers were 54, and the participation rate for 55+ is much lower than for the general population.

So as the Boomers hit 55, their participation rate dropped, bringing the top-line number with it. But let’s zero in on the last recession and its aftermath:

After leveling off at the end of the previous cycle at around 66%, the participation rate kept declining all the way through 2015. Two things were happening. First, Boomers were beginning to age out of the workforce. But also, we saw the unprecedented rise in “marginally attached” workers and a subset of that, “discouraged” workers

Marginally attached workers have had, or looked for a job in the past year, but not in the past 4 weeks. Discouraged workers are a subset who have told interviewers they want a job but have given up looking, at least for now.

As you can see, those numbers kept growing through 2011, and really put a ceiling on the recovery. Let’s zoom in on 2020:

So we see these are moving up sharply in April and ticking up in May. If we are getting a real bounce, we should see them come down soon, so this is something to keep a close eye on.

The labor force participation rate ticked up from 60% flat to 60.7% in May, but still down from 63.3% in February.

Another key indicator from the household report is going to be temporary and non-temporary job losses. Ideally, the job losses now being categorized as temporary will stay that way and the jobs come back. What we don’t want to see is those job losses switching categories to non-temporary. That has begun, but only a little so far:

BLS. All the error is in that blue box.

Right now, that’s only 300,000 workers switching categories, but we want to keep a close eye on this number going forward.

Summary bullets:

• The household survey is a real mess. The actual unemployment rate is likely in the mid to high teens.
• Amongst key indicators, only the labor force participation rate is going in the right direction. It is still very early in the game, however, and that can easily turn around.

The Employer Survey

The employer survey should be more reliable. The response rate was off a little, but not like the household survey, and there were no giant errors, at least that were reported. Here we see a small bounce of just under 3 million jobs, after losses of 21 million from February to April.

A big caveat here is that the last few years have seen giant annual revisions to these numbers, all downward, so these are likely overstating absolute levels.

BLS

For starters, there is a divergence in the report, as gains of 3.6 million private-sector jobs were offset by another 662 thousand government job losses, now totaling 1.6 million.

BLS

The reason this concerns me is this:

That’s state and local government employment added together. These governments cannot run huge deficits like the Fed, and were forced to continue reducing their workforces through 2013. This was a huge wet blanket on the last recovery.

You see what is happening now on the far right of the chart.

Summary bullets:

• The employer survey is much more reliable right now than the household survey. Even so, there is evidence that it may be way off as well. We just don’t know right now.
• It shows job losses of 21 million from February to April. Then May returned 3 million of these jobs, about 1 out of 7.
• Private sector and government employers are going in opposite directions, with private employers adding 3.6 million jobs, and state and local governments pulling out another 662 thousand.
• Continued job losses in the public sector were a huge wet blanket on the last recovery, so we need to keep a close eye on that.

So Who Got Their Jobs Back, and Who Didn’t?

We get two looks at this, one from each of the surveys. However, we can’t adjust the household survey’s occupational splits for their error, so that’s pretty unreliable.

But the employer survey seems more reliable this month, and always more detailed.

BLS

By percentage, by far the biggest gainer was construction, almost getting 80% of job losses back. As you can see, by nominal numbers, the biggest return was to restaurants and bars, but this was also the largest category of job losses in the first place. 74% of restaurant and bar workers have still not come back to work. There can be two interpretations of that data point:

• This is low hanging fruit, and additional job gains will be much harder to come by.
• There is still a lot of room to run.

You can probably guess how CNBC reported this data:

Let’s zoom in on “Hospitality’s Rebound”

BLS

Employment in the entire category is down 39% from February levels. Restaurants and bars saw 26% of job losses return, but the rest of the category lags far behind.

BLS

Unsurprisingly, CNBC missed the real big turnaround in the report, which is construction. Also, when we dig down on healthcare, we see that some categories had very nice turnarounds:

Other than dentists, these are much smaller job losses than leisure and hospitality services. But those first 3 columns combined saw a 29% rebound off the bottom, almost twice the restaurant bounce. I expect the rest of the categories to the right to follow. This is the one area I think we can be pretty confident that we will see a full recovery soon, even in the absence of a safe, effective vaccine.

But let’s turn to a few other areas that have giant job losses that I don’t believe are coming back soon, or may even get worse. The first place is in passenger transportation. Like in the leisure and hospitality services we already looked at, these are businesses that have very high fixed costs, and that rely on density and volume to make up for it. Full capacity will not be possible until there is a safe and effective vaccine.

BLS

Another area that worries me is business services, the recovery in which will be dependent on the recovery of the economy as a whole.

BLS

The big loser so far is employment services, which is almost entirely temp agencies. There was a tiny bounce there in May, but companies will have enough trouble hiring back their full time employees, and temp hiring may be very slow for some time.

The left column contains a wide range of business services, with the biggest losses coming from accounting offices, which doubled in May.

My fear is that this entire category is people who could have easily worked from home, but still 2 million of them were laid off. That is not encouraging for the future. As you see, employment in the left column has only declined 6% since February, one of the lowest numbers you will see. My fear is that it gets much larger, and many of the people now working from home wind up laid off like that 2 million.

Finally, state and local governments, which we have already discussed, but the splits there:

BLS

Summary bullets:

• The biggest single chunk of job losses was in restaurants, and also the biggest nominal recovery. Still, 74% or restaurant workers have not returned to work.
• The biggest percentage recovery came in construction and several healthcare categories. We can expect a full recovery in the latter, even in the absence of a safe, effective vaccine.
• Like restaurants, other hospitality and leisure services have high fixed costs, and make up for it with density and volume. Returning to full capacity cannot be done in a safe way until there is a vaccine.
• Passenger transport services also have the same business model and will be as challenged to return to full capacity any time soon.
• Business services will rise or fall with the rest of the economy. What concerns me here is that 2 million people were laid off, even though they could have worked from home.
• State and local government employment can be a key hindrance to recovery as it was in the last recession.

About That Vaccine...

I keep using the qualifier “absent a safe, effective vaccine” for a reason. This is the only thing that is truly a game-changer. At best, we could expect it by the beginning of 2021.

I am the last person to ask about the medical aspects of this, but I do want to comment on one thing. Moderna (MRNA) has received a lot of attention for its vaccine candidate, and it is now one of the 5 finalists in the US. When I went to look at their SEC filings, something popped out immediately:

EDGAR screenshot

I have never seen so many Form 4s, insider transactions, in such a short period. Surely, management must be buying in anticipation of a successful outcome.

Quite the opposite. Rather than hoarding every share they can get, Moderna leadership was selling like crazy in May, and now in June.

• CEO Stephane Bancel sold $3.2 million in shares from his children’s trust.
• President Stephen Hoge sold a modest 20,000 shares for $1.2 million.
• But the big winners were CFO Lorence Kim and the Chief Medical Officer Tal Zaks. Three Tuesdays in a row in May, and again this past week, they exercised options, and instead of keeping them, sold them all. Dr. Zaks netted $27 million and Kim an astounding $50 million. All in a 3-week span from May 12 to June 2. Nice work if you can get it.
• The company’s Chief Medical Officer, Dr. Zaks, currently holds zero shares, and has since May 5.

Does this sound like a company with a golden ticket? Please be careful here, and take all press releases from pharma companies that reference C19 with a grain of salt.

What’s The Actionable Analysis?

This is one of the notes I get from Seeking Alpha editors on my macro articles. Under normal circumstances, they are right - sometimes I forget what the implications of the macro landscape are for the stock market, which is what this site is about after all.

If in January, I had told you that the unemployment rate, then at 3.5%, was going to rise to 16% by May, your response may have been two-fold:

1. Are you crazy?
2. That would be the biggest calamity of all time.

Both would have been true in January, and they are still true now.

Now, suppose I told you that an auto rental company, the largest, had declared bankruptcy. Their bonds are secured by their fleet, which is worth a lot less today than it was when those bonds were written. There is a fire sale of used autos coming, when there are already giant inventories and declining prices. It’s a disaster of the first order; a perfect financial storm.

But not to the folks on Robinhood:

Robintrack

I am of course talking about Hertz (HTZ). What you see in that chart is the Robinhoodies driving the price of a disaster up 190% over 2 days.

So I have no actionable analysis for you until this fever breaks, and people realize that 16% unemployment is a bad, not good thing.

It’s not just ignorant, but also dangerous:

We are going to desperately need that “Phase 4” stimulus, and now people see no reason for it, because they are believing a pretty lie.

To be honest, the audience for my macro articles has declined dramatically since this began. People seem more interested in analysis that looks like it was based off a 10-second skim of the first paragraph of the FactSet report.

Someone is crazy, and I’m willing to accept that it may be me.

The purpose of these articles going forward will not be to provide actionable analysis, because I have none in an environment that totally eschews math and logic. For those of you left, I will report what I see in the data, and you can make your own judgements on what to do.

See you at the bottom.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Emptynester fka mom1]

In the commercial real estate world, here is what is going on : 
Too many office and retail tenants have moved out, stopped paying full rent and/or are trying to give back space and negotiate lower rents.
Landlords experiencing major liquidity crises. Collateralized letters of credit are being or have been drawn down and new equity is required to fund operating expenses and debt service.

Lenders are tightening the real estate lending criteria and the appraisals for new mortgages or refinancing are coming in significantly lower post-Covid.
Even if the Fed buys the loans from the lenders- the Fed has not “forgiven” the loans. Huge crisis slowly unfolding which will leave more “permanent” office and retail vacancies- as shift continues to “work from home” and online shopping.

[Ta0]

@Emptynester fka mom1
I'm thinking this same situation is happening in the housing market as well.
Within a year, real estate of all types will be much cheaper to pick up. It's not so much another black swan, just one more dark buzzard to join the rest of the wake.

[Trading Places Research]

@Emptynester fka mom1 Interesting. I expected a lot of this was happening but have no numbers on it. The corporate macro tables are months behind consumer stuff. Thanks for the color.

[Emptynester fka mom1]

The real estate market (all types- multi-family, office, retail, hospitality, industrial, self-storage, etc) is approx. $17T in value in the US.
Downtown, urban areas are and will continue to be hard hit. In addition to layoffs, if people continue to work from home, even some of the time, companies need a lot less space in downtown central business districts than they did pre-covid.
Furthermore, many will avoid, and will continue to avoid going to the mall, enclosed office buildings or any buildings with shared air conditioning systems that blow/recirculate shared air as long as the covid-19 threat remains.
As a result, people are less excited to live in expensive, urban apartments if the office, restaurants and bars are not safe to go to. Trend of urban living is already shifting back to suburbs.
This will take time, as in years, to implode. Borrowers, after months of not paying lenders will have no other choice than to give keys back to lenders. Then lenders will have to own/manage properties for a period of time before finally selling the real estate, at a loss, back into the market. Borrowers and lenders will both lose money. 
Even if this happens to a small, but meaningful percentage of real estate, it will affect rental rates and values for years.

[neocolonialist]

It is quite refreshing to see someone call this mess for what it is. I don't know how anyone jumps in right now with "an environment that totally eschews math and logic"! Well said!

[kimbillro]

"The definition of logic is a person going down the wrong road with confidence." - unknown @neocolonialist

[Curiosity Killed The Cat]

@Trading Places Research

This is the best (un)employment analysis I have ever read on SA. What the spin doctors did with Friday's BLA release boggled my mind so much, I felt like I was with Grace Slick down the rabbit hole. www.youtube.com/...

Go ask Alice, I think she'll know
When logic and proportion have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's off with her head
Remember what the Dormouse said
Feed your head, feed your head

[Trading Places Research]

@Curiosity Killed The Cat Thanks. Someone else posted Weird Al lyrics in the comments, so I think we are capturing the zeitgeist, at a bare minimum.

[kimbillro]

The market is screaming higher today.

[Trading Places Research]

A symptom of a country that can no longer look a big challenge squarely in the eye. Good luck, so long.

[investingInvestor]

TPR, thanks for the expert analysis of 'how to lie with statistics'.

SA: lies and dog whistles threaten your hard earned capital. Stay safely in the real world. Keep in mind that the COVID19 pandemic is the sole cause of the global recession. COVID19 begs for a coordinated global response. Multiple vaccines are the necessary endgame, if possible, whatever it takes.

Listen to experts like TPR who are assembling the '2020 storyboard' for informed investors.

I am up over 10 percent for the year, and am still seeing growth in some businesses. I worry about 'negative interest rates' very much after a 30 year projection of stagflation.

My MCMC models show much deeper downsides after 2019 and COVID19 stock leaps. There is some upside.

The toughest choice is between stocks and index funds. Heck, some of both has been successful.

[Tom Vacher]

@Trading Places Research, many of the best SA authors, Lyn Alder, Heisenberg and Calafia Beach are not offering actions. Illumination instead. To your HTZ observation add AMC who have indicated struggles reflected in bond yields but not equities. If you're mad, the dull thud you're hearing on the cell wall is me next door.

[Trading Places Research]

@Tom Vacher Not mad. Just sad that I live in a country that can no longer meet a large challenge head on.

[clrodrick]

@Tom Vacher - I have a feeling the dead cat bounce in Hertz stock is due to massive short covering. pretty typical in companies that declare bankruptcy (which can be a long process). Many shorts don't want to keep their capital/profits tied up to get that last 10% profit and just cover the short ahead of time

[kimbillro]

Thanks for the explanation @clrodrick .

[Ralf Anders]

Although it is probable that the stock market will crash once again, instead it could be the dollar the devaluation of which would lead to a rebalancing of things.

Weak Dollar => Rising Stocks
Stable Dollar => Falling Stocks

... I just wonder, how all of this strange situation develops this year and beyond.

[kimbillro]

We will find out in 6 weeks time @Ralf Anders .

[Value Digger]

According to a recent survey by the Conference Board below, many human resource executives at large companies say their organizations plan on laying off workers in the coming months as they see the impact of the crisis on their business:

www.conference-board.org/...

In other words, layoffs are far from over.

[kimbillro]

Thanks for the link @Value Digger .

[Trading Places Research]

@Value Digger Conversation I had on Saturday with a friend, who owns an import business.

Him: When is the data going to start showing what’s happening?

Me: What?

Him: There’s no recovery. It’s total shit out there.

Me: Oh. It’s not the data that’s lying, its the headlines you’re reading.

Him: That makes more sense.

[Value Digger]

Unlike many complacent and grossly incompetent fund managers, there is a reason why Warren Buffett is staying on the sidelines.

Specifically, unemployment rate is at a historically high 13.3% today versus 3.5% in Q4 2019.

However, SPY is today where it was in Q4 2019.

In other words, the big disconnect between valuations and fundamentals in Q4 2019 has become tremendous in Q2 2020...

[kimbillro]

The gap has grown.

[hottttdog]

Another mistake in the reported BLS jobs unemployment data? In any case, the effect of this underreporting of the unemployment rate was certainly significant! After the BLS reported "unexpected low unemployment numbers" the market Friday hit record highs. And the low BLS unemployment numbers are likely to also influence the Federal Reserve meeting this Wednesday, when it considers the proposed extension of the $600/week unemployment supplements that are scheduled to expire at the end of next month. Curious timing? It will be interesting to see how the market reacts tomorrow to disclosure of the latest BLS unemployment numbers "mistake".

[Trading Places Research]

@hottttdog The Fed is too smart to back off now, but Congress and the President is a different story.

[CarefulClimber]

> The purpose of these articles going forward will not be to provide actionable analysis

That is fine by me. I am looking to better understand the current macro so that I can make better decisions regarding my portfolio micro. What you are doing is very helpful.

[kimbillro]

It sounds like a deal to me @CarefulClimber .

[Trading Places Research]

@CarefulClimber Good luck. The Strange is everywhere.

[PMNI]

Very good analysis - and you can tell your editor that there's an obvious action to take....

[kimbillro]

What action @PMNI ?

[Diesel]

It's alarming that we have been reopening for several weeks now, yet less than 20% of the lost jobs came back so far, indicating that many if not most of those jobs might never be back.

[kimbillro]

It doesn't matter because the unemployed are making unemployment benefits of $600 + per week @Diesel .

[Diesel]

It matters for the engineers that just got laid off from Boeing. They were making more than $150k per year.

Also the $600 money expires in July.

[Trading Places Research]

@Diesel I didn’t mention it, but there are C19 hotspots flaring up as well from all that reopening, largely in the SW and SE. CA, TX and FL are the biggest states going up, but there’s a host of others. AZ is the worst right now.

Yet the discount the market is placing on a second wave is zero.

[Surfwatcher17]

Thanks for your data driven analysis. Anybody's guess when the next shoe will drop

[kimbillro]

After I get through partying @Upintheair1835 .

[Fundamental Trader]

Wednesday

[Salespunk]

This is one of, if not the best analysis I have seen in a while. Really appreciate the effort and you are not the one that is crazy. Robintrack tells us everything we need to know about the current rise in equities.

It is not an accident that this employment number showed up in a Trump 2020 ad within 24 hours of it being released. It is also not an accident that the numbers are always in the benefit of the current administration.

Know the players and you know the game.

[Ta0]

Employment numbers only go up to May 23 (I think). It's missing the last half of May.

[Trading Places Research]

@Ta0 Surveys are done on the week that includes the 12th, so in May that’s 10-16. Surveys for June are being done this week

[Ta0]

@Trading Places Research
Do you think this next survey will make the market jump higher?

[Ta0]

Everything you know is wrong
Black is white, up is down and short is long
And everything you thought was just so important doesn't matter
Everything you know is wrong
Just forget the words and sing along
All you need to understand is
Everything you know is wrong
https://youtu.be/KThlYHfIVa8

[Trading Places Research]

@Ta0 Weird Al is a national treasure and I will fight anyone who says differently.

[Ta0]

@Trading Places Research
Love Al 😍

[George Spritzer, CFA]

What do you call a stock that is down 80%?

Answer: A stock that dropped 90%, then rallied 100%.

[powercise]

This article is the best I have read in years. Well done. You are not the crazy one. No matter how many people tell you over and over again that up is down, or a tree is an elephant, its still not true. Once reality sets in, this is going to be a crash historic in depth and longevity.

[kimbillro]

I will not curb my enthusiasm. I partied all weekend drinking Coronabeer. Don't be a party pooper.

[Salespunk]

The longer this goes on the worse it is gong to be.

[Trading Places Research]

My humblest apologies to everyone, I just realized I made a transcribing error on the charts.

RESTAURANT/BARS IS BACK UP 26% NOT 16%. BIG DIFFERENCE, BUT STILL A LONG WAY TO GO.

Edits should be live soon. Sorry.

[Trading Places Research]

To be clear, the nominal numbers are correct, just that percentage was transcribed wrong.

[Jcholder]

Ok Negative Nancy, people are sick of drinking the koala I’d and going back to work!

[kimbillro]

Who is Nancy and why would you drink a koala? Try a cola and rum instead.
Celebrate the numbers @Jcholder .

[Mochaudhury]

Suppose the pre-covid record level market valuation was reasonable, which it was far from by any meaningful valuation metric. 

Now after 40 million unemployment claims, depression era like unemployment rate, 20%+ (annualized) GDP decline in first half of 2020, the market is near that level, and NASDAQ and Apple at new record highs. Just getting back to pre-covid earnings level, it will take at least until 2022.

And yet Powell and Trump cronies on Wall Street and CNBC and WH are not only justifying the outrageous current valuation, but declaring new highs. Such cheating and madness will continue until the unholy alliance of Wall St, Fed and Govt (Congress and Exec) is vanquished.

[kimbillro]

He wants to get reelected @Mochaudhury .