With COVID-19 largely on the decline across the United States, and much of the economy returning to some semi-balance of normal, we have begun to see the rough outlines of the economic shutdown’s long-term impacts and implications for recovery. This blog has previously questioned the extent to which the shutdown would have persistent effects on domestic fundamentals. Much of the headline data monitored by Astor would be stellar in any other context, and you can find support in some quarters for believing the recovery is purely v-shaped in nature. A deeper dive into the numbers, however, reveals that the current state of the U.S. Economy remains fragile.
The Astor Economic Index® (“AEI) improved for its third straight month to an above-average economic state. The AEI’s reading fits with what you might intuit about recoveries from transient shocks to the economy: a quick, sharp drawdown followed by a historically elevated change (not level) in economic output.
The data released last month has reflected this trend back towards pre-pandemic activity. The ISM Purchasing Manager’s Index for both manufacturing and non-manufacturing are at levels not seen since 2018: reflecting strong consumer demand and broad easing of containment measures.
However, cracks begin to show when the numbers are examined in detail and labor market developments are particularly worrying. The ISM Services PMI, for example, rose on strong new orders and business activity, but the employment subcomponent (which printed in contraction territory at 47.9) suggests tepid appetite for adding to payrolls through August.
Similarly, non-farm payrolls came in at a strong 1.3m, with net losses year-to-date at -11.1m and the U3 unemployment rate improving to 8.4%, down from 10.2% in July. Although these numbers are encouraging and suggest continued appetite for hiring back those temporarily furloughed: permanent job losses increased from 2.9m to 3.4m after being changed slightly last month. An increase in permanent job losses could mean that COVID-19 affected industries (especially hospitality) will be especially slow to make up lost ground. Initial jobless claims are harder to decipher following a methodology change but point to elevated labor market churn.
In aggregate, business activity shows a strong resumption of activity domestically, and the AEI appropriately reflects the rebound. Labor market developments, however, are likely to weigh on further gains as fiscal support ends and job losses prove sticky.