MainStreet Macro: An Unscripted Recovery

Oscar material, anyone? If you’ve been looking for a riveting drama, here it is.

You’ve heard the big news by now: Job creation popped in February, blowing through economists’ expectations. Employers added 379,000 jobs, the Bureau of Labor Statistics reported Friday, nearly doubling the consensus estimate.

The monthly data isn’t a disappointment on its face, but let’s dig deeper. Even with the jump in hiring, the U.S. still has had nearly 10 million fewer jobs in February than it did a year ago, before the coronavirus took hold. The unemployment rate last month was 6.2 percent — better, but likely understates the scarring in the labor markets.

It was another dramatic turn for the economy in a performance worthy of an Academy Award. Unlike the movies, though, this nail-biter is unscripted.

A global pandemic has never played a starring role in any previous downturn. The storyline that takes us to full employment is unknowable and plot twists are inevitable.

The Drama Unfolds

Let’s recap. In Act One, employers shed 22 million jobs last March and April, erasing all of the jobs created in the preceding 10 years of economic expansion in just two months.

Act Two, the recovery, is delivering more gut-wrenching action. The economy created 7.5 million jobs in May and June, but only 2.5 million jobs over the next six months. So far this year, job growth has been better, but far short of the summer surge in hiring.

Act Three

How does this story end? Is the job recovery sustainable? Is the Fed huddled in the library with a candlestick? A few weeks ago, I laid out three potential plotlines.

• The workforce gets bigger. More people who left the job market because of health or family concerns re-enter the workforce.
• Monthly job gains accelerate. To return to pre-pandemic levels of employment by 2024, the economy should produce upwards of 500,000 jobs a month on average.
• Wages rise for the right reason. As low-income jobs return, top-line wage gains will slow at first, then speed up as the economy improves.

Source: St. Louis Federal Reserve, Center for Disease Control

Plot twists

But this is drama is improvised, so we need to prepare for some plot twists. 

Plot twist One: Large vs. small firms

Small firms were hit fast and hard by the pandemic. Boosted by a round of federal stimulus late last year, they’ve eked out modest job gains in recent months despite the overall sluggishness of the market.

Large firms, by contrast, weathered the initial pain relatively well, but have been less successful over the longer term. According to ADPRI’s recent data, larger businesses with more than 1,000 employees lost 5,000 jobs in February, while the broader set of large companies (with 500 to 1000 employees) added 28,000 workers. Midsize and small companies added 32,000 and 57,000 workers respectively. Since October, larger firms have struggled to add workers and are down about 50,000 jobs.

Plot Twist Two:  The missing workforce 

The decline in workforce participation over the last 12 months is the worst in more than 60 years. Older workers retired early over concerns about their health. Women, who lost jobs at four times the rate of men, quit the workforce to take on new responsibilities imposed by closed daycares and remote school.

Black and Latino workers have seen larger job losses than other demographic groups due to their concentration in service-sector jobs, which were hit hard by the pandemic and enduring racial gaps in employment. The unemployment rate among Black Americans actually rose in February, to 9.9 percent. 

We need these workers back. If they can be enticed by the prospect of new opportunities and safer working conditions, it will be a turning point.

Plot Twist 3:  The hero arrives

Vaccines–those sure-footed rescuers born of rapid-fire innovation — surely will be remembered as the superheroes of the pandemic, along with health professionals, retail workers and teachers.

The economy’s story arc will turn on widespread inoculation and herd immunity. This is the cliffhanger that makes the timeline to a complete jobs recovery difficult to predict.

My Take

This economy isn’t reading from a written script. New subplots keep cropping up that could swing the narrative in untold ways, but I am cautiously optimistic we’ll see a happy ending soon. Here’s why.

Vaccinations are picking up. Whenever a friend tells me they’re getting a shot in the arm, I cheer, both for them and the economy. The more vaccinations, the more quickly communities can relax social distancing and reopen their economies.

The audience is antsy. The economy is and always has been an audience-participation show. Pent-up consumer demand could accelerate the pace of hiring, especially in leisure and hospitality, as people return to restaurants, take vacations, and go to concerts.

Stimulus could be coming. Biden’s $1.9 trillion stimulus bill is gaining traction and ADP research shows that when stimulus comes in the form of loans for small business, companies are able to rehire faster and retain workers.

As much as we’d like the predictability of a script, the recovery will be improvised. Prepare for more of the whiplash we saw in February’s data, with surging gains in some months and lost momentum in others, before we see the big finale.