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Half of July's nonfarm payrolls gain on shaky ground

Aug. 07, 2020 1:13 PM ETSPY, XLF, XLYBy: Kim Khan, SA News Editor53 Comments
  • The July employment report gave a sense of relief to the market that the job market is trending in the right direction again. Headline numbers were solid, but some distortions already have economists looking to the August report for better clarity.
  • Nonfarm payrolls rose 1.76M last month and the jobless rate fell to 10.2%. But at least half of that payrolls number seems impermanent.
  • The biggest gain in payrolls came in the leisure and hospitality sector, which added 592K jobs. Of those, 502K came from restaurants and bars as states relaxed lockdown rules. Amusements, gambling and recreation added 99.6K jobs, while performing arts and spectator sports lost 12.8K.
  • The survey period for the data is just through the first half of July and wouldn't capture a lot of moves by states to shut down bars and indoor dining after a spike in cases.
  • There was also a seasonal distortion in education jobs. Local government education added 215K jobs and state government education added 30K.
  • "Typically, public-sector education employment declines in July (before seasonal adjustment). However, employment declines occurred earlier than usual this year due to the pandemic, resulting in unusually large July increase," the BLS said.
  • "That will be reversed ... especially given the number of school districts that have gone online," Grant Thornton Chief Economist Diane Swonk told CNBC. "That will suppress those numbers as we move into August."
  • Without these classification errors, the unemployment rate would've been a percentage point higher, Danny Blanchflower, economics professor at Dartmouth, told Bloomberg.
  • The number of those out of work for more than 15 weeks jumped to 8M from 3.3M in June. As a percentage of workers, the longer-term unemployed rose to 48.8% from 18.7%. More encouraging, permanent jobs losers remained about flat.
  • The narrative of a V-shaped recovery continues to lose credibility, especially if you believe the definition from Oaktree's Howard Marks that both sides of the V must be symmetrical and the recovery of output has to come at the same pace as the decline. About 22M jobs were lost in two months and 42% of those have been recovered in three months.
  • In absence of the July distortions, economists will get a better picture of the landscape in August, but it will likely be a month-to-month analysis for a while.
  • "What we have to very carefully do it watch things month by month and see where we go,” Blanchflower says. “I have nothing in the past (to refer to) to help me with this. We have to see if there is a second round of the virus, if there is a second round of layoffs in firms."
  • ETFs: SPY, XLY, XLF

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