Strong employment number in june, but will it last?

Nonfarm payrolls rose by more than expected in June while the unemployment rate fell considerably. However, these gains likely won't be repeated in the next few months due to the recent re-acceleration in COVID-19 cases.

June Labor Market Report Stronger Than Expected

Data released this morning showed that non-farm payrolls rose 4.8 million in June, which was significantly higher than the 3.2 million increase that the consensus forecast had anticipated. Over the past two months, payrolls have rebounded 7.5 million, as businesses that were shuttered due to the pandemic re-opened and began to call back furloughed workers (top chart). That said, the labor market still has a long way to go to recoup the 22 million jobs that were lost in March and April.

Once again, employment gains were broad-based. Increases were concentrated in industries that had borne the brunt of the layoffs. Specifically, payrolls rose nearly 2.1 million in June in the leisure & hospitality sector (i.e., restaurants, hotels, etc.) and 740K in the retail sector. The addition of so many relatively low-paid workers to the employment rolls brought down average hourly wages by 1.2% in June, which continues to reverse the 4.7% surge in April, when these workers initially dropped off payrolls. Employment among state & local governments, which had contracted by roughly 1.5 million between February and May, due in part to school closures, rebounded by 32K last month.

The unemployment rate fell by more than most analysts had expected, dipping to 11.1% in June from 13.3% in May (middle chart). But to repeat our point from above, the labor market still has a long way to go as nearly 18 million individuals are currently classified as unemployed. In February, fewer than six million were jobless when the unemployment rate stood at only 3.5%. If there is a silver lining to the jobless rate, it is that the misclassification of workers between "employed" and "unemployed," which appears to have depressed the "actual" unemployment rate in April and May, may not to have been much of a factor in June. That is, the "actual" unemployment rate does not appear to be significantly higher than the 11.1% that was reported for last month.

Separately, the Labor Department reported that 1.4 million individuals filed a first-time claim for unemployment insurance last week. Although down significantly from the 6.9 million claims that were filed in the last week of March, the number of first-time filers remains inordinately high. Moreover, the number of individuals who continue to receive unemployment benefits remains elevated at roughly 19 million (bottom chart).

In sum, the labor market report was generally stronger than expected, and should be welcomed. However, with the number of COVID-19 cases accelerating and some states delaying re-opening or imposing new restrictions, we are concerned that a significant number of individuals may become furloughed again. The outsized gains in payrolls that were registered in May and June likely won't be repeated in the next few months.

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