The Independent Market Observer

Weak Jobs Report Highlights Economic Risks

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Dec 4, 2020 2:11:37 PM

and tagged Commentary

Leave a comment

jobs reportThis morning’s jobs report was a disappointment. Total new jobs came in at 245,000. This result was well below the 460,000 expected and even further below the 638,000 we saw last month. Looking under the hood, the details were not great either. Private job growth dropped from a strong 906,000 last month to 344,000, again well below the expected 540,000. Even if we adjust for the effects of expiring temporary census jobs, at 93,000, this is still a notable weakening of what until now had been a very resilient employment picture.

Widespread Bad News

The drop came from the effects of the third wave of the pandemic, as a combination of changes in consumer behavior and policy restrictions and lockdowns hit the service sector. Much of the decline came from the leisure and hospitality sector, where job gains dropped by 90 percent, from almost 300,000 in October to only 31,000 last month. Retail employment was actually down by 35,000. Indirect effects of the pandemic include a drop in state and local government employment, driven by budget shortfalls caused by the pandemic. The bad news was widespread.

Better news included a decline in the unemployment rate, from 6.9 percent to 6.7 percent. Here, the details are also worse than the headline. The decline came not from more employment but from a drop in the labor force, which is now 4 million below pre-pandemic levels. That may be a sign that the unemployed have stopped looking for work. In total, this was a discouraging report. It signals that even as the vaccine news gets better, the effects of the pandemic are still very much a headwind for the economy.

What Does This Mean Going Forward?

The biggest risk will be to consumer confidence and spending, which are more than two-thirds of the economy. We have already seen softening of both, and a weakening employment picture could worsen that. The real question is whether the damage will be severe enough, or long lasting enough, to derail the economy between now and the next six months or so, when vaccines should start to get the pandemic under control.

With the third wave continuing to get worse, that is a real possibility. Worth noting, though, is that before the Thanksgiving holiday, there were signs the pandemic might be slowing. While the holiday has distorted the data, that slowdown still remains a possibility. Increasing use of masks and social distancing, as well as another round of governmental restrictions, should help roll the third wave over, even if we do get another surge from holiday travel. Based on what we know so far, we can reasonably hope that the third wave crests in the next month or so. If that happens, the economic damage should start to recede as well.

What About Another Stimulus?

The medical risks and their effects on the private economy are important—and that is what we have been looking at so far. The other thing to watch is whether there is another round of federal stimulus. On the private side, several programs are set to expire this month, and that could substantially worsen the consumer situation. Also at risk is state and local employment, which as noted above is already showing signs of strain. These levels of government are under severe fiscal stress and starting to lay people off. Absent federal stimulus that specifically targets them, this situation could get significantly worse.

Third Wave Is Hitting Hard

The news today means the third wave is now hitting the economy harder than we thought and that the damage is likely to keep adding up in coming months, until we get vaccines widely deployed. The two key factors in how bad it will get are whether infection growth crests and whether the federal government steps in with another round of stimulus. Today’s report means that both are more critical than we thought.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®