The broad US stock market gave up an initial 1.5% gain after the Labor Department announced higher-than-expected payroll gains of 4.8 million Thursday morning, closing just 0.5% higher. A number of industry analysts noted that the Labor Department’s reference week for reporting was June 12, the week prior to a new round of shutdowns as Covid-19 infections spiked in many US states.
Workplace mobility data published by Google reflects the physical presence of individuals in the workplace. By this highly-accurate measure, employment flat-lined during the second half of June in the second half of the month and fell in virus-stricken California. Restrictive measures introduced by other states in response to a record level of new infections almost certainly will lead to job losses in July.
Google data for mobility at retail and recreation venues show a nearly-identical pattern, with visits to shops and restaurants rising early in June but stabilizing or declining during the second half of the month.
Almost three-quarters of the payroll gain came from recreation and leisure (mainly restaurants) and retail stores. The mobility data showed that growth in visits to these businesses stopped at a national level at the end of June and turned down in Texas, one of the worst-affected states – even before state governments announced a reversal of reopening.
The rate of new infection in the US has roughly tripled to 60,000 new cases per day from 20,000, which means that stringent social isolation measures will probably be invoked.
A return to economic normalcy in the US faces two daunting obstacles, namely the weakness of small businesses and consumer confidence.
During April and May, US consumers saved 32% and 23% of their incomes, respectively, a level of savings never seen before. The uncertainty shock of the Covid-19 pandemic persuaded Americans to put money aside as a precaution. That is not a complete loss for economic activity, because some of the savings are used to buy homes. Nonetheless, consumer spending comprises 70% of US gross domestic product (against an OECD average of 60%), and the US is particularly vulnerable to a downturn in consumer spending.
Small business fragility is another barrier to recovery. Businesses with fewer than 50 employees account for almost half of all US employment, and they are concentrated in sectors most affected by the pandemic, including retail and leisure and hospitality. The payroll-processing firm Paychex publishes a monthly employment index for small business, and it showed no improvement during June.
Capital spending by US companies hasn’t contributed much to economic growth during the past dozen years, and won’t help much this year or next. CapEx among US companies is concentrated in the energy sector, which doesn’t drill new wells when oil prices are low.
The chart below shows the after-inflation value of new orders for non-defense capital goods excluding aircraft. This measure, a proxy for US companies’ CapEx, tracks the oil price fairly closely.
We can expect flat or even negative employment and retail sales numbers during July and August, depending on the severity of restrictions due to the Covid-19 epidemic.