The past two weeks have brought in several major positive US data surprises that augment our confidence in the more constructive macro narrative that we have embraced since the start of this crisis.
However, none of these compare to the unprecedented upside surprise in the May unemployment report of last week, as payrolls increased by 2.5 million during the month against expectations for a 7.5 million decline. This 10 million-delta cannot be simply waved away as a measurement error (even though there is some of that) but instead should be accepted as evidence that the labor market healing has begun.
The result was actually not that inconsistent with other data signals: payrolls data show that 19.6 million jobs were lost since February, close to where continuing unemployment claims stood during the weeks ending 15 May (20.9 million). In any case, while May’s report was much better than what was anticipated even by us, we do believe that the deterioration phase in the US labor market is over and the next phase—already afoot—is one of healing. Improved terms for the Paycheck Protection Program should accelerate this process in the coming months. On 8 June, the US Federal Reserve announced a second tweak to its imminent Main Street Lending Facility (reducing the minimum loan size, lengthening repayment terms and taking more of the loan risk). All such changes are aimed at supporting the recovery and by implication the labor market.
Macro Narrative to Shift Toward Upcoming Recovery?
The question is not whether we are heading back to a 3.5% unemployment rate any time soon—we are not! Rather, we should ask whether this string of positive surprises would lead to a shift in the macro narrative away from the extremely grim projections over the past few weeks to something more constructive. To some, it may seem like the wrong moment to ask such a question given that the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) has declared that the US economy is in recession, ending what had been the longest expansion on record (128 months).
But we believe this is precisely the time to ask such a question. Consensus estimates tend to change slowly and by the time forecasts bottom (which seem to be the case now), the underlying economic activity typically starts to improve. Indeed, the NBER notes that “the usual definition of a recession involves a decline in economic activity that lasts more than a few months”. However, other considerations such as intensity and breadth matter and warrant “the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.” If the recession turns out to be quite brief, when will the broader macro narrative shift to an upcoming recovery? The equity market seems to have already made a turn toward this direction.
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