Cumberland Advisors Market Commentary – Digging Deeper

On Friday, the Dow bounced over 750 points, reacting to the May employment report. In truth, it seems that participants never read beyond the first sentence, which stated: “Total nonfarm payroll employment rose by 2.5 million in May (private sector employment increased 3.1 million while government employment declined by 585 thousand) and the unemployment rate declined to 13.3%….”

Market Commentary - Cumberland Advisors - Digging Deeper- Who Was and Was Not Employed

This report was truly a surprise, especially to economists who predicted the unemployment rate to hit 20% and the economy to lose another 8.5 million jobs (https://www.cnbc.com/2020/06/04/the-may-unemployment-rate-is-expected-to-be-near-20percent-as-millions-more-lost-jobs.html). That’s a big miss, to say the least.

Digging deeper, there were clearly some other positives in the report besides the headline numbers, especially in the Establishment Survey, which looks at where the jobs were created. On a seasonally adjusted basis, 22% of the jobs (669K) were created in the goods-producing sector, the bulk of which were in construction. But a whopping 78% of the jobs were created in the service sector, with the leisure and hospitality segment, which had been hard hit by the pandemic, adding 1.239 million jobs. Other gains were reported in retail (367K) and in education and health services (427K), while government employment declined by 487K. Additionally, average hours worked increased slightly, as did average weekly earnings.

The picture was not so optimistic when it comes to who was and was not employed. While the overall reported unemployment rate declined from 14.1% to 13.3%, the unemployment rate for black Americans increased from 16.7% to 16.8% and increased for Asian Americans from 14.5% to 15.0%, but declined for Hispanics and Latinos from 18.9% to 17.6%, a rate that exceeds that for black Americans in particular.

Digging even deeper, our chairman, David Kotok, pointed out some interesting and sobering information at the very bottom of the report about the impact of COVID-19 on employment data collection and possible implications for the confidence intervals surrounding the numbers. In particular, the report notes that because of the virus, adjustments had to be made that reduced the survey response rates, which were 69% for the establishment survey, below its historical average, and 67% for the household survey, 15 percentage points below its pre-pandemic rate, implying an increase in the confidence intervals. To illustrate, the average reported monthly job creation from the establishment survey from January 2019 through February 2020 was 185.6K, with a 90% confidence interval of plus or minus 110K. In other words, a reported number of 185.6 could be as large as 295.6K or as small as 75.6K. If comparable intervals were applied to the reported 2.5 million new jobs for May, then the actual number could be as large as 4.25 million or as small as 750K.

Similarly, the 95% confidence interval for the reported unemployment rate before the pandemic was plus or minus 0.2 percentage points. The report states, however, that furloughed workers were considered to be unemployed. At the same time, the large number of workers who were classified as employed but absent from work were probably misclassified. If these people had also been considered unemployed, as the furloughed workers were, then the reported unemployment rate would have been 16.3% for May and 19.3 percent for April, close to the 20% that economists had predicted.

The bottom line is that digging deeper reveals that the employment situation may not be as rosy as the headline numbers suggest, due to reporting and classification errors that reduce the confidence one can have in the reported numbers. In other words, it is risky to put too much weight on a single data point when the confidence intervals are large (and likely to be even larger than history has suggested) when we are in unsettled times.

Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
Email | Bio


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Cumberland Advisors Market Commentary – Comments on April Job Losses

Dear readers,

Here’s a meaty analysis of the Friday employment report.  Please note the link will take you to a $27 a month trial.  After you read this report, you may find it worthwhile. Please note: I’m a paying subscriber. Enjoy.

-David


COMMENTS ON APRIL JOB LOSSES
TLR Analytics
Cumberland Advisors Market Commentary - APRIL JOB LOSSES - TLRwire

An appalling employment report, reflecting massive dislocation and misery. An appalling employment report, reflecting massive dislocation and misery. And the real unemployment rate is actually almost 20%, 5 points higher than reported (see below for details).

• Employers axed 20.5 million jobs in April, making for a decline of 12.9% from a year earlier. That annual rate is a record by a wide margin. The previous record was -7.6% in September 1945, during the postwar demobilization. At 131.1 million, total employment is back to where it was in February 2011, which was itself back to March 2004 levels, thanks to job losses in the Great Recession (a name that might have to be retired) and its aftermath. And that March 2004 level was the same as February 2000’s, because of the 2001 recession and the jobless recovery that followed it. So, employment now is the same as it was 20 years ago even though the civilian noninstitutional population is up 48.3 million, or 23%.

• Almost every sector and subsector lost jobs, and lots of them. Mining and logging lost 50,000; construction, 975,000; manufacturing 1.3 million; wholesale trade, 363,000; retail, 2.1 million (with the notable exception of “general merchandise, including warehouse clubs and supercenters”); transportation and warehousing, 584,000 (though, with all that online shopping, couriers and messengers were up 2,000); information, 254,000; finance, 262,000; professional and business services, 2.1 million; education and health, 2.5 million (including 1.4 million in health care, a bizarre development during a massive health crisis); leisure and hospitality, 7.7 million; and other services, 1.3 million.

• Government was off 980,000, all of it state (-180,000) and local (-801,000). It’s distressing that at a time when people need public services, they’re being radically shrunk, and a sector that is supposed to act as an automatic stabilizer is acting instead as a downward accelerant. During the worst phases of the Great Recession, state and local government employment declined at an annual rate of around 1.5%; April’s level was off 4.5% from a year earlier. Since February, local government fell by 5.5%, state education by 8.8%, and local ed by 5.9%. Local government employment is a central support in rural economies, many of them already weak, and currently getting hit hardest by the pandemic.

• All four diffusion indexes made record lows, with the one-month measure at 4.8, and the three-month at 6.0. You have to look at some of these numbers two or three times to believe them.

• Technical notes Because “business births and deaths” will not offset in the current period, BLS included recent data in their birth/death model instead of the usual seven-month lag. Without this adjustment the model would have added 250,000 jobs to the NSA total. Instead it subtracted 800,000 jobs. And, as they did last month, they turned off the outlier offset to let the data stand. Also, data collection was unhampered by the crisis. The data collection rate for April was 75%, unchanged from the twelve months into February, and higher than March’s 66% and last April’s 72%.

• In the turmoil, the workweek rose 0.1 to 34.2, as a 2.1 hour decline in manufacturing was offset by a 0.5 hour rise in services. Aggregate hours worked in the private sector were off by 14.9%, with little differences between goods and services. That broke the previous record of a 1.3% decline.

• Average hourly earnings rose an eye-popping 4.6%—for the month, not the year, which was up 7.9%. Clearly the job losses are concentrated among lower-paid workers, pushing up the average. That mix effect is visible in two classic low-wage sectors: leisure and hospitality, up 6.8% in April, and retail, up 4.4%. By contrast, high-wage sectors like information and finance had increases under 2%—still high by historical standards, but less dramatically so, presumably because so many in those sectors are working from home.

• Household employment measures were grim, off 22.4 million overall, or 27.0 million when adjusted to match the payroll concept. The employment/population ratio cratered, falling from 60.0% in March to 51.3% in April, an all-time low. In the 1950s, before the mass entry of women into the labor force, it occasionally got as low as 55%. Its all-time high was 64.7% in April 2000. If people were employed at that rate now, there’d be almost 35 million more working.

• Unemployment soared, the rate rising more than 10 points from 4.4% to 14.7%. But that rise was partly masked by massive labor force withdrawal, as the participation rate fell from 62.7% to 60.2%. Had all the labor force dropouts been counted as unemployed, the jobless rate would have been over 4 points higher, or 18.9%. Also, in the March release, the BLS “text boxed” that although they requested people to report themselves on temp layoff they, apparently, instead checked “absent from work.” Had they reported themselves as requested the rate would have been 1 point higher. The confusion continues, and this month the rate would have been 5 points higher, 19.7%. The broad U-6 rate rose from 8.7% to 22.8%, shattering its previous record of 17.2%, set in April 2010. The share of the employed working part-time for economic reasons more than doubled, from 3.7% to 8.2%.

• Most of the increase in unemployment came from the freshly jobless, with two-thirds the increase coming from those unemployed less than 5 weeks. But a third was accounted for by those unemployed from 5 to 14 weeks, since problems first started in March. That influx at the short end took the mean duration of unemployment from 17.1 weeks in March to 6.1 in April, and the median from 7.0 to 2.0. Both mean and median are all-time lows.

• Job flows numbers were just as bad as you’d expect, with 11.2% of the March employed becoming unemployed in April (up from 1.7% in February–March), and another 6.1% dropping out of the labor force (up from 3.7%). Also, 35.7% of the March unemployed dropped out of the labor force in April, up from 25.3%

• If you’re desperate to find a cheering note buried amidst all the red ink, almost all the unemployed report themselves on temporary layoff rather than permanent job losers. Similarly, a Washington Post–Ipsos poll reports that 58% of laid-off workers think it’s “very likely” they’ll get their old jobs back, and another 19% say it’s “somewhat likely.” One hopes this is based on sound reasoning and not wishful thinking; one wonders how many of their employers will be able to survive months of zero revenues.

As dire as these numbers are, we hope no one draws the conclusion that getting people back to work ASAP is a more urgent need than keeping people from getting sick. We have to think of employment loss and GDP declines as side-effects of the treatment of disease and not as avoidable signs of over-reaction. A poll just out from Gallup finds broad support for this point of view. Quoting the release: “Gallup’s Coronavirus tracking poll finds the vast majority of Americans either very (57%) or moderately confident (30%) that social distancing saves lives. A relatively small minority reported skepticism — 12% are ‘not at all’ or ‘not too confident.’” There are, sadly, gaps by party affiliation, though 77% of Republicans fall into the two “confident” subcategories (compared to 98% of Democrats and 84% of Independents). We do, of course, have to get back to work, but that project must be thought through and carried out very carefully.

—Philippa Dunne & Doug Henwood


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‘That was shocking’: Strong job gains give GOP extra fuel heading into Election Day

Excerpt from The Washington Post,
‘That was shocking’: Strong job gains give GOP extra fuel heading into Election Day
By Heather Long and
Danielle Paquette
November 2, 2018

Cumberland-Advisors-David-Kotok-In-The-News

Hiring surged and wages grew more than they have in almost a decade, the government said Friday in a report seized on by Republicans just before the midterm elections as evidence their policies are delivering for American workers.

Trump and Republican candidates painted the jobs report as further proof of an economic boom, but many independent economists warn that growth has probably peaked and that it is likely there will be a slowdown, especially if trade tensions continue to escalate.

“The economy peaked in the second quarter of this year and has been slowing for four to five months,” said David Kotok, chair of Cumberland Advisors. “The trade war is slowing the growth rate, because tariffs are a sales tax imposed on Americans by the U.S. government.”

Markets jumped immediately after the release of the report Friday but ended the day in the red, with the Dow Jones industrial average down almost 110 points mainly on concerns that the U.S.-China trade battle won’t end soon.

Read the full article at The Washington Post