The Week in Review: June 8, 2020
Astounding Jobs Report!
Analysts had expected the unemployment rate to rise from 14.7% in April to 19.8% in May (Econoday consensus). On top of April’s record 20.7 million drop in jobs, non-farm payrolls were expected to decline by another 7.7 million.
Instead, non-farm payrolls surged a record 2.5 million, and the unemployment rate fell to 13.3%. The consensus missed by an astounding 10.2 million jobs. Put another way, analysts didn’t simply miss by a mile. They missed by something like 10.2 million miles.
With little precedent on which to base forecasts, economists failed to take reopenings into account. Instead, they continued to focus on the number of individuals filing for unemployment insurance, which is declining but remains at a historically high level (Department of Labor).
Except for education, we saw strength across the board in May, including retail, leisure and hospitality, construction, and manufacturing jobs.
Bottom line, the report was a large dose of good news and a real shocker! A 2.5 million rise in payrolls (3.1 million in the private sector) was completely unexpected and gives credibility to the argument that a V-shaped economic recovery may be in the works.
It’s something that investors have been suggesting for weeks, as they attempt to price in state reopenings.
Note the table of returns for the major U.S. market indexes. The broad-based S&P 500 Index is down just 1.14% YTD and down a modest 5.7% from the February 19 peak.
You see, any given level of a major market index is the collective wisdom of tens of millions of large and small investors. Not only do they offer an opinion, but they offer an opinion that is backed with money.
They don’t always get it right, but they have been trying to sniff out a more robust economic recovery than many thought possible.
Risks remain (they never completely fade), as we don’t know if we’ll see a surge in infections that could stifle activity or how quickly individuals may flock back to stores. Might recent protests or a relaxing of social-distancing guidelines encourage transmission?
That said, if businesses are reopening, it seems reasonable to suggest that at least some increase in economic activity is occurring.
One final remark
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting MORE THAN A FEW MONTHS ...”
If the economy bottomed in April or May (after peaking in February), did we enter a recession based on the official definition? When the NBER created its characterization, it didn’t take a sharp but short-lived decline in activity into account.
Let’s see what May’s spending data tells us. The economy has fallen into a deep pit, and layoffs will continue, but May’s jobs report suggests we may be seeing the start of a robust economic bounce.
If you have any questions or concerns, feel free to reach out to me, Tyler, or Will.
Two for the Road
“The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich.” —Charles Dow
“Every decade or so, dark clouds will fill the economic skies, and they briefly rain gold.” —Warren Buffett in Berkshire Hathaway’s 2016 annual letter to shareholders (I have included this one before, but I really like it, and after Friday’s market action, I thought it was very appropriate!)
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