Is a 50% recovery in 3 months just chump change?

I’m hearing some analysts say the July jobs report was disappointing because it shows the economy still has a huge number of people out of work. That’s true: the unemployment rate has only come down from a high of 14.7% in April to 10.2% in July, and that’s still way higher than February’s low of 3.5%. To bolster their case, they also note that seasonal adjustment factors overstated the job gains in July. That’s true too: the non-seasonally-adjusted employment growth figure rose by only 591K in July vs. the seasonally adjusted headline figure of 1763K.

So: is this glass really half empty? Let me explain why I see it as half full.

Chart #1 is my long-time preferred measure of the health of the jobs market: the level of private sector jobs on a seasonally-adjusted basis (the private sector is where all the economy’s dynamism comes from). From a high of 130 million in February, jobs fell to a low of 109 million in April. They have since increased to 118, and that represents a recovery of 9 million jobs, or 43% of the total loss. To be fair, you could say that since the economy has recovered only 43% of the jobs it lost, the economic glass is half empty.

However: Chart #2 shows the non-seasonally-adjusted version of Chart #1. Here we see that jobs fell from a high of 128 million in February to a low of 108 million in July, and they now stand at 119 million. That’s a recovery of 11 million jobs, or 55% of the total loss. So by looking at the raw data, one could argue that the glass is more than half full. To be fair, let’s average the 43% of jobs recovered using seasonally-adjusted data with the 53% of jobs recovered using non-seasonally-adjusted data and say that in the past three months the economy has recovered about half the jobs lost in the Covid shutdown catastrophe.

Is this just chump change? Just how lousy is a 50% recovery of the jobs lost during a deep and painful recession in just 3 months? Consider the recession of 2008-2009, which you can see in Chart #1. The total job loss from the 116 million high in December ’07 to the 107 million low in February ’10 was 9 million. Coming out of that Great Recession, it took the economy about two years (until early 2010) to recover half of the jobs lost. Today’s economy has bounced back very quickly by historical standards. You might even call it a “V” shaped recovery, no?

I think it’s very impressive, especially considering the huge headwind that Congress’ $600/week bonus unemployment payout created. I pointed this out in early May, by the way. That bonus of $600/week effectively gave a raise to about two thirds of those collecting unemployment—they made more by being unemployed than they made while working. In effect, the government was giving millions of workers a raise and at the same time telling them to take a 3-month paid vacation, because the bonus $600/week would extend through August 1st. So despite very generous unemployment benefits, roughly half of the unemployed have returned to work! I won’t be surprised to see stronger job gains in the months to come, thanks to the loss of $600/week that has now kicked in.

Unless, of course, Nancy Pelosi has her way and extends the $600/week bonus through the end of the year. If Trump has his way instead, he will direct the IRS to stop collecting payroll taxes through the end of the year (he would then promise to sign legislation next year to forgive these taxes). This would be very bullish, because it would not only increase the after-tax wages received by all those who work, it would also reduce the after-tax cost to employers of every worker. Employers would have a significant new incentive to re-hire or add to their workforce, and employees would have a new incentive to find a job and/or go back to work.

Pelosi’s plan would be a disincentive to growth, Trump’s plan (championed by my long-time friend Steve Moore at the Committee to Unleash Prosperity) would instead incentivize growth.

There is reason to be optimistic.

Now for some quick updates to charts I’m watching on a daily basis:

As Chart #3 shows, the stock market has recovered almost all of its Covid/shutdown losses, and investors’ fear levels have fallen significantly. The market is looking across the valley of despair in the belief that a recovery is underway and we will eventually return to some semblance of normality within the foreseeable future.

Chart #4 compares the price of gold to the price of 5-yr TIPS (using the inverse of their real yield as a proxy for their price). Both of these utterly different assets are in a sense safe-havens. Gold protects against the unknown and is considered by many to be a hedge against inflation. TIPS are default-free and promise investors a government-guaranteed inflation hedge (their effective yield is the sum of actual inflation plus their real yield). Both work as a safe port in a storm. That both are soaring in price is a sign that investors these days are willing to pay a steep price for protection. Risk aversion, in other words, is alive and well.

Chart #5 shows the nominal and real yields on 5-yr government bonds (red and blue), and the difference between the two (green), which is the market’s implied inflation expectation over the next 5 years. Note that pretty much all of the rise in expected inflation this year is due to a decline in the real yield on TIPS. Investors are paying up for inflation protection, as Chart #4 also shows, but expected inflation is still expected to be relatively tame (currently just 1.5% per year) from a historical perspective. If anything stands out on this chart, it is the unusually low level of real yields. Real yields are heavily influenced by current and expected real growth rates in the economy, as shown in Chart #6, so this is a sign that the market is still quite concerned about the long-term outlook for economic recovery.

As Chart #7 shows, airline passenger traffic was roughly flat for most of July, following a fairly dramatic recovery in April, May, and June. The latest data hint at a resumption of growth. To be fair, this chart does not support the view that the economy is still in a v-shaped recovery mode.

But it’s not unreasonable to think that the so-called “second wave” of Covid new cases and new deaths, shown above, which sparked renewed attempts by a number of states to roll back their re-openings, was the reason economic growth appears to have stalled (as Chart #7 suggests) in the past month. If that’s true, then we can take heart from the fact that new cases appear to have subsided of late (which further suggests that new deaths are likely to soon peak). This reduces the need for continued restraints on state economies.

In my view it’s terribly unfortunate—and rather scary from a libertarian viewpoint)—that state and local authorities have resorted to draconian measures (e.g., shutting down churches, gyms, and many restaurants) to hobble their economies in a vain attempt to “beat” the virus. I have not been able to find anyone who can marshall compelling evidence that lockdowns improve Covid outcomes. Most statistical analyses I have seen find no relation between the degree of economic lockdown and the number of deaths from Covid.

In our understandable and collective rush to save lives and deny the virus, we are tragically ignoring a fundamental truth of economics. Thomas Sowell, arguably our greatest living economist, put it simply: “There are no solutions, there are only tradeoffs.” Viruses can’t be “beat,” they can only be slowed down or minimized. Locking down an economy today may postpone deaths but it can’t eradicate the virus. Most importantly, economic lockdowns incur terrible costs, as we now know, that are measured in trillions of dollars of lost income, tens of millions of lost jobs, hundreds of thousands of bankrupt businesses, and countless lives lost to other diseases and suicides.