Could the Recovery be Losing its Legs?

Recent disappointing news on the spread of COVID-19 has raised questions about whether the rebound in economic activity has been dealt a serious blow. Ironically, this comes at a time when the blowout 4.8 million increase in employment in June again surpassed forecasts by experts by a country mile. Will these emerging chutes of economic recovery be snuffed out by continuation of the pandemic?

Before looking at prospects going forward, let’s get some insight from the recent jobs market data. Between the May and June survey weeks of the employment reports, 7.1 million people filed for unemployment insurance. This, coupled with the 4.8 million net gain in employment, means that roughly 12 million people returned to their jobs or started new jobs last month. Of those, a survey of households suggests that nearly 5 million returned from a temporary layoff. This tells us that the jobs market, while still having a long way to go before we get back to pre-COVID days, has been extremely active and responsive to the rebound in demand.

Job gains in June were widespread by sector, with the greatest increases occurring in the service sector where the previous losses were greatest. Notably, retail trade (especially clothing stores) and leisure and hospitality (hotels, bars, and restaurants) posted outsized gains. Meanwhile, employment at food and beverage stores, which has been little damaged by the virus, continued to edge higher and was 2 percent above a year earlier. These patterns should be no great surprise because the lockdown shifted our eating from dining out to preparing our own meals at home. We also postponed buying apparel for a while but have recently been venturing back.

Construction and manufacturing (especially motor vehicle) employment registered solid increases in June as demand for big-ticket items has bounced back (see June 27 post, Encouraging Signs). However, food processing (which had been hit hard by the pandemic causing bottlenecks in getting some items, such as meats, to our stores) rose only slightly in May. Of note, temporary help services reported a huge increase in employment last month, suggesting that many employers, in responding to the pickup in demand, are hesitant about hiring permanent workers until they are confident that the resumption of demand will persist.

The total number of hours worked last month (the total number of people working multiplied by the average number of hours worked) increased 3.6 percent, on the heels of a 4.5 percent gain in May. Nonetheless, total hours worked in June were 10 percent below the peak in February, confirming that we still have a lot of ground to make up. For the second quarter, hours worked were down 13 percent from the first quarter (not at an annual rate), guaranteeing that the second quarter will register the largest drop in real GDP on record.

Nonetheless, these and other data are showing that businesses have been responding promptly to the pickup in demand and are finding creative ways to do so. As pent-up demand continues to be released, businesses will exhibit new ways to meet the challenges. Everyone has learned a lot since the onset of the COVID-19 crisis and American ingenuity and entrepreneurship will continue to play a major role in keeping the recovery going. Looking ahead, employment growth can be expected to be solid but less dramatic, which is normal (“trees don’t grow to the sky”). While COVID spikes may lead to brief pauses, this recovery has legs and coming quarters will see vigorous gains in output.

For more on the dynamic behavior of market economies in the face of shocks, see Chapter 2 of my new book, Capitalism Versus Socialism: What Does the Bible Have to Say?