USA: The Jobless Recovery

The United States added 1.76 million Jobs in July 2020, compared to a consensus estimate of 1.48 million.

Unemployment fell to 10.2% vs 10.6% expected. It is true that the rate of job creation is slowing down and labor force participation rate remains at 61.4%, but we need to compare the figures with the rest of the world, where we are witnessing a worrying “jobless recovery”.

Headline official unemployment rates are misleading due to different subsidies and furloughed jobs. If we use comparable figures, the United States inactive share of the labor force is significantly smaller than the same figure in the Eurozone. In the eurozone, unemployed, subsidized jobless schemes and furloughed account for more than 23% of the labor force, according to Morgan Stanley. This compares with a 16.5% United States’ unemployed plus not at work plus excess dropouts. It is a particularly important difference that shows the United States is outperforming in the recovery. It also shows something that many commentators ignore: Massive entitlements and government spending plans have not helped the Eurozone improve its job market in the recovery.

In this crisis, there have been two policies when addressing the unemployment challenge: dynamism vs intervened job mechanisms. The second has allowed the eurozone to show an optically low unemployment rate while around 40 million workers remained in furlough schemes. Preserving the labor market dynamism may have created alarming headlines for the United States, but has allowed it to recover faster and to post unemployment numbers, both the official and underemployment rates, that would be the envy of many eurozone countries.

Once we have established the differences between both economies, we must alert of a global problem, the jobless recovery.

Markets and investment analysts have greeted the latest global PMI (purchasing managers’ index) figures with euphoria. Most leading economies posted PMIs in expansion in July, and the global index pointed to a return to growth both in services and manufacturing… But companies continued to shed jobs after three months of reopening.

If we analyse the job component of global PMIs published by IHS Markit, we can see that all sectors except three continued to destroy jobs in July 2020 as firms faced overcapacity and weak growth in sales. The worst job losses came in the Auto & Auto Parts sector, Media, Metals and Mining, Technology Equipment and Tourism & Recreation. The only sectors that created jobs in July on a global level were Pharmaceuticals & Biotechnology, Healthcare Services and Real Estate. The most worrying part is that the Real Estate job creation was mostly temporary and seasonal.

A global PMI recovery with widespread job destruction shows us that most of the headline PMIs simply reflect a month-on-month bounce from depressed levels, not a return to pre-Covid industry levels. Yes, there is a recovery, but -as we mentioned in this column before- if governments don’t implement significant supply-side measures that incentivize new business creation and growth in small ones, we may find that the global activity trend weakens almost as fast as it bounced.

Without a rapid recovery of the lost jobs and a sustainable increase in consumption we may find that the build in overcapacity and slack in the economy will prolong the downturn and make it more difficult to heal the economy.

So far, the United States is leading in employment improvement, but the full recovery is extremely far away. The United States cannot be complacent and accept an unemployment rate of 9.3% in 2020 falling to 5.5% in 2022 as the Federal Reserve predicts. Unemployment needs to be back to pre-Covid19 3.5% rate quickly, and that will only be achieved with bold supply-side measures, tax incentives and a strong policy of capital attraction. The United States needs to separate itself from other governments’ policies, it must liberalize and cut red tape to boost job creation because the recovery is stalling in many developed and emerging economies and copying failed interventionist measures will not bring employment back.