The economy's temporary problems are becoming permanent: Morning Brief

Sam Ro

·Contributor

Updated Mon, Oct 5, 2020, 2:54 AM4 min read

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Monday, October 5, 2020

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America’s permanent job losses continue to rise

The light is dimming for one of the few glimmers of hope amid the Covid-19 economic crisis.

When the economy started shutting down during the early phases of the coronavirus pandemic in March, economists argued that the bulk of the job losses would be temporary as these workers would be recalled once businesses were cleared to reopen. Indeed, the economy has experienced a partial snapback from the depths of the crisis.

But seven months later, many businesses remain closed. Many have gone bankrupt. And the effects of the prolonged economic pause are rippling out in the form of real economic pain.

In the U.S. payrolls report released on Friday, we learned that 3.75 million American workers identified as “permanent job losers” in September, up from 3.41 million from the previous month and 1.28 million back in February before the lockdowns. Meanwhile, those on “temporary layoff” fell to 4.64 million in September, down from 6.16 million in August and 18.06 million in April when the measure peaked.

“One of the less encouraging details was the continued grind higher in the number of unemployed persons classified as permanent job losers,” JPMorgan economist Michael Feroli said on Friday.

The number of workers identifying as permanent job losers continue to rise. (FRED, St. Louis Fed)

Morgan Stanley’s Ellen Zentner noted that the climb in permanent job losers represented “the largest two-month increase in permanent layoffs since March 2009.”

“While job growth continues at a more moderate pace and unemployment continues to trend down, this dynamic bears very close watching because we have noted how permanent layoffs can lead to longer unemployment durations and slower rate of re-employment as a result,” Zentner said.

It’s probably worse than it looks

Deutsche Bank economists led by Matthew Luzzetti dug into the numbers and suggested that we should be considering an adjusted number for the permanent job losers by taking into account those on temporary layoff for an unusually long period of time.

“If we add in those on temporary layoff for 27 weeks or longer, the amount of ‘permanent’ unemployment would be about one million higher at 4.5 million,” Luzzetti wrote. “This number also continues to steadily increase. Instead, if we look at permanent unemployment plus those on temporary layoffs with unemployment spells 15 weeks or longer, the number jumps to 7 million.”

The growing number of permanent job losers reflects major problems underlying the U.S. economy. (Deutsche Bank)

“As temporary layoffs look increasingly like permanent separations, we think these adjusted measures are the more appropriate metrics to look at for the possible longer-term effects of this crisis on the labor market,” he said.

Even the optimistic scenario isn’t OK

Still, we shouldn’t give up on the many folks who continue to believe they’re on temporary layoff.

But as Bespoke Investment Group’s George Pearkes observed, we’ll need more than those 4.64 million to return to work for us to see a full jobs recovery.

“Assuming every single one of them found a job tomorrow, total nonfarm payrolls would still be 6.1mm below the February peak,” Pearkes said.

And so while it certainly could be worse, there’s not much to suggest that the economy is OK.

"The cumulative increase in payrolls since the April low is now 11.4M, recovering just over half the 22.2M peak-to-trough plunge after Covid struck,” Pantheon Macroeconomics’ Ian Shepherdson said. “But the rate of improvement has clearly slowed, as the resurgence of the virus has constrained the pace of reopening, and the early signs for October are not encouraging."

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today

Economy

9:45 a.m. ET: Markit US services PMI, September final (54.6 expected, 54.6 in prior print)
9:45 a.m. ET: Markit US composite PMI, September final (54.4 in prior print)
10:00 a.m. ET: ISM Services Index, September (56.2 expected, 56.9 in August)