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First Cut: A strong June employment report is only partially reassuring

The 4.8 million rise in nonfarm payrolls in June reflects the survey reference period that closed out on June 13. At that time things were looking rosier for the economy with activity in leisure and hospitality opening up and fiscal programs to cover payrolls in wide effect. While the level is well above the median expectation for job gains in June and appears to have upward momentum from the 2.699 million increase in May, it should be read with caution. Some of those government programs will stop providing funds by the end of July and an upsurge in COVID-19 infections is forcing a new round of closures in the very sectors that showed the most gains in the past two months. I also note that even the combined increase of 7.499 million in June and May does not come close to wiping out the 20.787 loss in April.

While overall the June data represents welcome improvement, in the historical context the labor market situation is still fragile with unusually high unemployment and job gains in sectors that are vulnerable to sudden and big cuts should activity suffer a setback. The bottom line is that it is far too soon to celebrate or declare that the recession is on the way out.

The Establishment Survey showed service-providers had an increase of 4.263 million in June that included increases for retail (739,800), transportation and warehousing (98,700), and healthcare and social assistance (474,900). However, it was leisure and hospitality (2.088 million) that was the real source of payroll gains. However, these could easily be lost again if large swaths of the service sector are forced to close. Jobs among good-producers were up 504,000 with solid hiring for construction (158,000) as housing picked up and in manufacturing (356,000) as factories reopened.

The arrival of workers back in public-facing sectors had a depressing effect on hours and earnings. Some of those workers were brought back to only part-time status. Also workers were broadly lower paid, and therefore dragged average hourly earnings down 1.2% month-over-month. The predominance of workers at the higher end of pay scales who have not been furloughed means that the year-over-year increase of 5.0% is still distorted by fewer lower-paid workers in the survey data.

The Household Survey put the June unemployment rate at 11.1% after 13.3% in May, but problems in correctly assigning responses persist. What can safely be said is that unemployment is going down. The U-6 unemployment rate was down to 18.0% in June after 21.2%, another indication that workers are being recalled. The participation rate was up to 61.5% and also reflects workers back on the job. However, the level of job losers is still elevated, if down 4.019 million to 14.272 million in June. The numbers could be helped by relatively few new entrants to the labor force in June at up 27,000 to 563,000.

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