In mid-December, when I was pegging market and economic trends, I said “Don’t be surprised if we see job losses in future US jobs reports in the new year.” And with both the ADP Wednesday and the US Labor Department data today confirming this outcome, I want to expand on the thinking. I believe the US is likely to see lockdowns in Q1 and that job losses will continue. And to me, this speaks to the recession base case I have posited for a couple of months now. Some thoughts follow below.
Update on my view
Back in mid-December, I pointed to jobless claims and wrote that “I’ll refrain from looking forward too much here but I think the figure is going higher.” In the interim, jobless claims have actually been lower. So, from a backward-looking perspective, I would say that I am slightly more optimistic about my recession call not happening. By that I mean that the ADP and Labor Department reports showing December job losses won’t necessarily continue in data released next month, given the dip in jobless claims. But I see serious economic headwinds going forward.
So, in a nutshell, with the blue wave now confirmed, I would expect that fiscal and monetary stimulus would be enough, if present conditions continued, to prevent a recession in the US. But I don’t expect present conditions to continue. Nor do I expect fiscal stimulus to be large enough to overcome the income losses likely to occur in Q1 as the third US wave of the pandemic reaches its peak.
Yesterday, we had over COVID-related 4,000 deaths recorded in the US for the first time ever. And we see case counts at 280,000. With average case count levels up 15% in the last two weeks and hospitalizations up 10% before the holiday season-related apogee of infection is reached, we can be assured that worse is to come.
On top of that, we have the maskless super-spreader insurrection from yesterday taking COVID back to state after state around the country, seeding further community spread. And we have B117 variant COVID likely to explode the case counts going forward. Healthcare system overloads will be rampant across the US. So, be prepared for severe state- and municipality-mandated lockdowns later this month and into February.
I am, therefore, despite some optimism related to the jobless claims data, more convinced of a Q1 recession in the US than I was in December.
The numbers
Let’s look at today’s numbers from December’s data briefly.
- December non-farm payrolls down -140,000 vs expectations for a rise of +71,000 according to investing.com. Upward revisions of +135,000 to two prior months.
- Private sector lost -95,000 jobs vs expectations for a rise of +98,000 according to investing.com, confirming ADP (but November was revised up by +73,000).
- Household survey showed +21,000 jobs added, headline unemployment rate steady at 6.7% vs expectations for 6.8%, and U6 rate down to 11.7% from 12.0%.
- Participation rate unchanged at 61.5%
- Average hourly earnings at a very robust +5.1% y-o-y versus expectations for 4.4% and 4.4% in the November data
So, despite the headline job loss, I would say the data underneath are better. From a backward-looking perspective, it again confirms the view from jobless claims that the US economy has not been as bad as I had expected in late November and December. Based on these data alone, I would be heartened about the prospect of avoiding recession, despite the headline job loss figure.
My View
The job loss in the December data was in the areas of the economy that were shut down in December like leisure and hospitality. And prior months’ data were revised up. That means, absent shutdowns the reverse radical recovery would have been intact. The shutdowns arrested the economy’s momentum and led to job losses. So, any future shutdowns will do the same going forward.
As I expect more severe shutdowns going forward, I expect job losses too, perhaps not in the January data but in the February and March data. And I, therefore, expect a concomitant loss of spending and a decline in GDP for Q1.
Would that qualify for a recession or is it just a blip on the way to the vaccine rollout? We’ll see. But I think the tunnel until vaccine rollout is longer than many anticipate. We have at least the Winter and Spring to get through, and likely the summer. We might be here next January without everyone having been vaccinated. That’s two years of a pandemic-affected economy. Be prepared for that eventuality. And I don’t think market expectations are in line with this outcome.