Jonathan Marriott, Chief Investment Officer
On Thursday, President Trump held an impromptu press briefing to hail the most recent employment numbers. These showed a record growth of 4.8 million in non-farm payrolls and unemployment was down from a peak of 14.7% two months ago to 11.1%. These numbers are generally better than expected and, on the surface, show a strong recovery. The concern is that these numbers may not reflect the true situation and are coming off the back of exceptionally poor figures. The U.S. Bureau of Labor Statistics that compile these numbers said that the unemployment rate is about 1% lower than it should be due to misclassification.
Job protection plans could be delaying reality
This is the second monthly rise in payrolls, with over 7 million jobs recovered. However, during March and April, payrolls fell by 22 million so the number of jobs recovered is still relatively low. The US Paycheck Protection Program only came in after many parts of the country had already closed down, therefore these job recoveries may be due to people returning to work or job cuts being reversed due to the implementation of the protection plan. By contrast, in the UK, the furlough scheme came in before the country locked down reducing a surge in unemployment. The job protection plans have helped reduce an initial increase in unemployment, but we do not know how many jobs will be lost when these schemes are no longer in place.
The non-farm payroll numbers are as of 12th June so do not reflect the re-imposition of restrictions due to the surge in COVID-19 cases in some parts of the US. The weekly data released on Thursday also showed a 1.4 million rise in initial jobless claims and continuing claims at 19.3 million which were both higher than expected and may be a more accurate reflection of the situation.
Improved data figures still months away
Gathering economic data is difficult during a pandemic and unemployment is clearly distorted by government action, therefore it may be some months before we know the extent of the long-term impact. For now, President Trump is keen to get people back to work and to take credit for any positive news as he builds towards the November presidential election. His handling of the pandemic has received much criticism and the virus is now beginning to hit the republican heartlands. When the pandemic first broke out, it was concentrated in the east and west coast states that had voted for Hillary Clinton at the last election. This week we have seen record daily confirmed infections, with many states that previously voted for Trump amongst the hardest hit.
The data problems are not confined to employment statistics or specific to the US. Up to 20% of items in the UK Retail Price Index basket could not be priced, such as drinks in pubs, hotel accommodation, flights and dental check-ups. These items were estimated using past seasonal data combined with inflation as measured by the rest of the basket. This weekend we will start to see pubs, hotels and restaurants opening up but, given restrictions, prices may have to be higher to compensate for the limited numbers of people they are allowed to serve. As we get better price discovery, we may find that the inflation rate has been distorted.
Predicting the shape of recovery
As a result of these distortions, there is an increased interest in fast indicators of activity. Andy Haldane, Chief Economist at The Bank of England, said this week that “the fast indicators used by the Bank have included data on payments and credit card transactions; Google searches of key economic and financial terms; measures of traffic flow, including around ports; measures of footfall on the high street; mobility and transport use metrics; bespoke surveys of households and businesses; and measures of energy demand.” His conclusion on the evidence so far is that the UK will have a V-shaped recovery, which would be welcome news.
When assessing equity investment, we need to look at the prospects for individual companies rather than just the macro data. Over the next few weeks, companies will report their second quarter results so we will have a better understanding of the impact of the pandemic on earnings. For now, we should take high-level macro data with a pinch of salt and not get too excited by the numbers.
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