Questions around the scope of the structural damage dealt to the US economy in March and April have haunted the rally in equities and credit, despite both having largely recouped their respective pandemic losses.
2020 has seen its share of bankruptcies, especially in retail and energy, and many fear another wave of credit events is likely in the cards.
In addition, the persistence of the virus in the US (due in part to the absence of a coherent federal containment strategy), raises the specter of additional small business closures and increases the odds that businesses which were closed temporarily will ultimately shut their doors for good.
Read more: Closed Forever
Fed officials have variously warned on the risks of “scarring”, and have pledged to do everything in their power to prevent structural damage. And yet, eligible lenders in the Fed’s Main Street Lending program (which aims to facilitate the extension of credit to “regular” businesses) have issued just $497 million in loans, a paltry sum compared to the program’s capacity.
Meanwhile, 71% of small businesses have now exhausted funds received through the Paycheck Protection Program, a recent National Federation of Independent Business survey found. “The 29% still using their loan are likely not far behind”, the survey cautioned.
The implications of this for the US labor market are clear enough. Unemployment could reset structurally higher. “Temporary precarity” (as I often put it), could become permanent.
For example, even as the July jobs report came in well ahead estimates, marking the third consecutive monthly beat, it showed that those unemployed for at least 15 weeks jumped 4.692 million last month, a record.
In the same vein, the share of unemployed Americans who have been jobless for 15 to 26 weeks is up 175% over the course of the pandemic. That cohort’s share of the total is almost 40%.
Recently, The White House touted the jobs “created” over May, June, and July as evidence of a quick recovery. While the upside surprises (versus consensus estimates) for those months’ jobs reports were unequivocally a good thing, suggesting they count as “organic” (if you will) job creation is disingenuous in the extreme.
As Goldman writes, in a note dated Friday afternoon, “the rehiring of temporarily laid off workers has driven the robust labor market rebound since April”. In other words, the economy isn’t really “creating” jobs. Rather, those who were laid off during the panic are going back to work.
Again, that is unequivocally a good thing, and Goldman reminds you that it’s “historically been associated with quick economic recoveries”. But it’s an important distinction to make.
There are still more than 9 million Americans “temporarily” laid off, which the bank suggests leaves the labor market “poised for additional large job gains later this year”.
Goldman goes on to offer a “caveat”. “Unemployment spell durations for temporarily laid off workers have been extended to unprecedented lengths”, the bank says, speaking to the first visual above.
The share of those temporarily laid off who have been unemployed for at least five weeks was 84% in July, down just slightly from 90% the previous month. Those figures, the bank notes, are “both over 20pp above the previous high following the 1981-82 ‘Volcker Recession'”.
Additionally, nearly two-thirds of temporarily laid off workers in last month’s household survey were unemployed since at least April.
“These patterns raise questions about how many of the current temporary layoffs are really temporary”, Goldman says, before detailing the optimistic assessment, which essentially revolves around two points. Together, these points “suggest that the large share of temporarily laid off workers can continue to be a tailwind for the economic recovery”:
First, temporarily laid off workers in May-July most likely either remained on temporary layoff or returned to work. In contrast, transitions to permanent unemployment remain near historic lows. Second, temporarily laid off workers face much better hiring prospects than permanently laid off workers, even after extended unemployment spells… Even after 30 weeks of unemployment, workers on temporary layoff are almost 20pp more likely to be rehired the next month than permanent job losers [during recessions].
But it’s not all good news. Specifically, things began the look more tenuous for the “temporarily” unemployed in July.
For one thing, Goldman notes that “the transition rate from temporary to permanent layoffs nearly doubled from 3.7% to 7.0% from June to July”. That rate will probably go higher, the bank warns, as the effect of the Paycheck Protection Program and “other fiscal support that boosted hiring in the early stage of the recovery” wanes.
Needless to say, if Congress fails to act on more relief, the situation will be commensurately worse.
Additionally, it’s worth noting that survey results tracking the perceptions of the temporarily unemployed have become detached from the share of the temporarily jobless when it comes to workers’ expectations for returning to their prior occupation.
The implication from the disconnect between the blue triangle for July and the dark grey line for the same month is that, to quote Goldman, “up to 25% of workers on temporary layoff have doubts they will be recalled”.
Ultimately, the bank combines recent trends in the transition from temporary to permanent unemployment with transition trends from the GFC to arrive at an estimate of the total number of temporarily jobless workers who will become permanent job losers.
Specifically, the bank assumes the more benign recent trend “persist[s] for the next few months, but start[s] to resemble a more typical recession as transitions decay to the GFC average by mid-2021”.
The implication, from Goldman: While the rehiring of temporarily jobless workers will fuel a net 5.6 million job gains by year-end, “almost a quarter of temporary layoffs will become permanent, implying scope for roughly 2 million of these individuals to remain unemployed well into next year”.
The bank’s Joseph Briggs sums it up in the simplest possible terms. Goldman’s analysis “suggests almost a quarter of temporary layoffs will become permanent”, he writes.