Why Didn’t Upbeat U.S. Non-Farm Payrolls Result in the Unemployment Level Decline?

The U.S.A. is leading the world in the post-Covid reopening. In the aftermath of 4th July’s sluggish pace of markets, it makes sense to observe the most recent macro releases that didn’t necessarily clearly address all the vital questions the retail investors have been keeping in mind. We all need maximum clarity in this respect, because there is still huge ambiguity in terms of is it the right time to move back to cyclical stocks, or we are not out of the woods yet, and, hence, still need to stick to the defensive (acyclical) securities. Recent robust hikes of airline stocks (let alone cruise companies’ stocks) may appear to be premature, which may lead to more portfolio losses at the end of the day.

According to The Wall Street Journal, “the U.S. economic recovery is unlike any in recent history, powered by consumers with trillions in extra savings, businesses eager to hire and enormous policy support. Businesses and workers are poised to emerge from the downturn with far less permanent damage than occurred after recent recessions, particularly the 2007-09 downturn”. So why don't these “trillions in extra savings” help prop up the implied bullishness? Is it possible that these extra savings aren’t for buying stocks or even stuff, but they are rather for buying capital protection (AKA anti-inflation hedge) and, say, medical insurance?

Look at Friday's Nonfarm Payrolls Report, for example. The U.S. economy added 850,000 jobs in June. It was the biggest monthly job creation gain since August 2020, when the economy added 1.6 million jobs. Although the number of new job openings has comfortably beat expectations, the overall level of unemployment in the U.S. suddenly jumped up. How can these two factors possibly coexist? The answer is quite tricky, but can also be found in the recent news’ headlines. The unemployment rate stood at 5.9%, up from 5.8% in May because the number of people quitting their jobs voluntarily to look for another position jumped by 164,000 to 942,000 in June – the highest level since November 2016.

So the job openings aren’t always translating into jobseekers’ moves to fill them. According to the report, 6.2 million Americans indicated that they didn't work at all or worked less because their employer had been affected by the pandemic. Moreover, as WSJ indicates in another article, as U.S. employers’ search for hires increases in urgency– especially in the manufacturing, logistics, healthcare and food-service industries – truck drivers, hotel cleaners and warehouse workers are being offered signing bonuses of hundreds and even thousands of dollars. Nearly 20% of all jobs posted on job search sites, like one quoted in the article ZipRecruiter, in June offer a signing bonus, up from 2% of jobs advertised on the job search site in March.

Apparently, employers are puzzled by the unwillingness of the basic workforce to return to their jobs for same amounts of remuneration. But these “sign-in bonuses” aren’t coming out of thin air. They represent the employers’ deferred costs that will compress their ongoing margins. True, as WSJ rightfully pointed out, the past Covid-invoked recession wasn’t a typical cyclical downturn, because consumers are still keen on spending, and, hopefully, the Covid-restrained deferred demand will explode in the coming months to boost retailers and manufacturers’ profits. But, conversely, some economists are afraid that this surplus demand can still be largely funded by government and employers’ subsidies rather than by the sought increase in productivity. The latter is still very much contingent on people’s sense of overall personal safety and working environment prudence. With medical bills still climbing, people are unwilling to trade paychecks for risks of being reinfected. However, to date, very few sectors have invested or seriously planning to invest in the game-changing sanitary and hygiene matters. This is exactly where the widest mental gap is located.

The bottomline is that the next months’ U.S. employment data will be important like never before. It will be indicative for the stock market and for the rest of the world in general, in terms of whether we are going to see traditional workforce comebacks and, hence, organic increase in consumer spending, or our expectations will be short-lived.