Tag Archive: economy

“K”-shaped economy clearly visible in the labor market

The US labor market is showing mixed signals depending on the data and time period used. Here we review some data that can help identify the divergences and put current conditions in context.

There has been much discussion about the “K-shaped” recovery in the economy following the shock of the initial lockdowns in the second quarter of this year.  The “K” is meant to represent a sharp divergence between industries and workers who have been unaffected by or benefited from recent conditions (the top of the “K”), and those who have been hurt (the bottom of the “K”).

This contrasts with other “letter” descriptions tossed around that included a “V” (a rapid, broad-based rebound in activity after a sharp decline), “L” (economy weakens and remains depressed for a sustained period), or “W” (a sharp rebound followed by a second leg of weakness before a final recovery).

The data we show here highlight the “K” shaped tendencies in the labor market right now: workers who have remained employed have continued to see solid real wage gains on average, but many fewer people are working or even participating in the labor market at all. These data can help remind both investors and policy makers to look at the broad scope of data and not be distracted or misled by selected information that may make things look too rosy or excessively bleak.

The first chart below shows the median inflation-adjusted hourly wage growth as calculated by the Atlanta Federal Reserve. It avoids the issues of changing sample composition that plagues the widely-followed average hourly earnings data by tracking wages of specific people (in aggregate) who are employed over time. It shows real wages (hourly, or salaried converted to hourly) growing at about 2% year-on-year, which is near the higher end of the range over the last 20 years and corroborates the resilient data on consumer spending this year. This captures the top section of the “K” in which those with jobs, particularly in industries that have held up or benefited from the shifts in the economy, are still seeing solid wage gains after accounting for inflation (which remains low overall).

Real median wage growth K

The second chart below shows the long-term trends in employment growth, labor force growth, and the labor force participation rate. Employment growth (measured by monthly nonfarm payrolls) remains severely negative on a year-over-year basis, still worse than the trough in 2009 even after the recent rebound. Perhaps more distressingly, the labor force (the sum of all people working or looking for work) is shrinking at its fastest pace in decades, as people give up looking for work or are forced to by circumstances. This is essentially the bottom section of the “K”, where people in the most affected industries or who cannot work due to illness, caring for relatives, or closure of their business, are not only unemployed but not even really participating in the labor market at all right now.

Employment Labor Force Trends K

The bottom section of the chart shows the labor force participation ratio, which is the percentage of the entire US working-age population that is in the labor force (working or looking for work). It has been declining for 20 years, and after some slight pre-COVID gains has taken a big step lower this year. After an initial rebound from the lowest point earlier this year, it has been stuck around 61.5% since June. Thus a smaller percentage of people in the US are even participating in the labor market. While some of this can be explained by long-term demographic changes (more people reaching retirement age, etc.), it means that an increasingly narrow base of employed people are seeing wage gains and supporting aggregate consumer spending. The big longer-term economic policy question therefore becomes (or remains) how to broaden the labor force again and increase participation and employment, and not be misled by the apparent strength in aggregate consumer spending data that is being supported by fewer people.

 

Unemployment is still a huge issue

The latest weekly report on unemployment claims was released yesterday and provoked mixed responses depending on how the data was (or was not) analyzed. While unemployment claims data is not a perfect measure of the national job market, it is one of the most timely measures and gives a good picture of what is going on (though long-term comparisons can be difficult). Recent methodology and seasonal adjustment changes along with reporting of state-only (not federal) claims data have caused some confusion among investors.

The chart below shows the current preferred measure of ALL continuing (not initial) unemployment claims over the last 12 months, i.e., including the total of all the newly created or expanded federal unemployment assistance in addition to the regular state-level unemployment benefits that are normally reported. The data are not seasonally adjusted, and are shown on a log scale to better capture percentage changes. The picture is pretty clear: the trend in unemployment has not improved materially since May despite the signs of a rebound in economic activity. The positive side is that more unemployed people than ever before are getting at least some benefits while out of work thanks to the expanded federal support programs started in April (far more so than in the 2008-09 Great Recession). This highlights the economy’s current reliance on federal fiscal support.

Total Unemployment Claims

We can see that before February there were around 2 million people getting unemployment benefits (and fewer than that most of last year), which were all from regular state-level programs, and since May there have been steadily between 27 and 30 million people getting benefits from state and federal programs combined. The latest data (for Aug. 15th) shows the number back to the upper end at 29.2 million.  The US labor force (people over 16 deemed working or looking for work) as of the end of 2019 was about 159 million people. So over 18% of the pre-pandemic labor force is now collecting some kind of unemployment benefits, with no real trend of improvement visible yet.

Since part of the confusion about the weekly claims reports is related to the presence of the new federal programs in addition to the standard state programs, we break down the two categories in the chart below. Many state unemployment benefits normally only last 26 weeks, though there have been extensions in some cases. The major federal programs (Pandemic Unemployment Assistance, PUA, is the largest, with Pandemic Emergency Unemployment Compensation, PEUC, the other major one) are designed to both expand who can receive benefits (self-employed, gig workers, people working to support family at home, etc.) and extend the duration of benefits when state programs run out. As the months have passed, some people originally on state benefits (or who would normally have been ineligible) have switched over to the federal programs. We can see this in the chart, where the state-level data (blue line) has been declining from its peak, but the federal programs (red line) have been rising to largely offset the decline in the state data. Indeed, the total in federal programs has now exceeded those in state programs for the first time. This is why the total for all programs together has shown no material improvement (as in the first chart above), but those watching only the standard state-level data argue that employment conditions are improving.

US Unemployment Claims State vs Federal

While the supplemental benefit of $600/week for many of those getting benefits expired at the end of July, the benefits from federal support programs (PUA) are due to run out at the end of this year unless they are extended. Thus there will continue to be much attention focused on Congress as they debate if and how to provide additional economic support, with much uncertainty especially as the November elections approach.