The monthly employment report from the Department of Labor may be the most closely watched economic statistic there is: investors, economists, and government officials all examine it for information about how the U.S. economy is doing. But it is far from being an entirely reliable indicator. In May of 2016, when Donald Trump was campaigning for President, the jobs report said that payrolls had risen by just thirty-eight thousand. Trump proclaimed this news to be a “bombshell”; Reince Priebus, the head of the Republican National Committee at the time, said that the numbers demonstrated the failure of the Obama Administration. It turned out to be a blip. In both of the next two months, more than a quarter of a million jobs were created.
In statistical terms, the jobs figures are “noisy”—meaning that they tend to jump around, distorting the underlying trend. On Wall Street, this has long been recognized. Years ago, I wrote a profile of Victor Niederhoffer, a veteran speculator who made his living investing in the futures markets. Niederhoffer was an inveterate risktaker, but he did take some safety precautions. Every month, shortly in advance of the employment report, he would close out most of his positions. The jobs bulletin was too unpredictable to take the chance of being caught out, he explained. I thought of Niederhoffer on Friday morning, when the Labor Department reported that the economy had created just two hundred and sixty-six thousand jobs in April.
This is what’s known as a big miss. Many Wall Street economists had predicted that the figure would be close to a million, or more: Goldman Sachs had said 1.3 million; Morgan Stanley expected 1.25 million. The large undershoot prompted a vigorous debate. Echoing statements from employers that they are having difficulty finding workers to fill vacancies, Republicans and business organizations called on the White House to cancel the three-hundred-dollar weekly supplement to unemployment benefits that was included in the latest pandemic-relief package. “The disappointing jobs report makes it clear that paying people not to work is dampening what should be a stronger jobs market,” the U.S. Chamber of Commerce said in a press release. Some Democrats argued that the real problem was a lack of adequate child care, which was preventing working parents from returning to the labor force. “The numbers tell the story,” Senator Elizabeth Warren said in a statement. “There were 8,000 fewer women working in April compared to the previous month, and 64,000 fell out of the labor force entirely.” Other observers pointed to a continuing fear of the coronavirus as a factor dissuading people from going back to work.
In search of guidance about what is really happening, I called up one of the few economists who had warned that the April jobs report might not be as strong as expected: Gregory Daco, the chief U.S. economist at the consultancy firm Oxford Economics. In a Twitter thread on Thursday, the day before the numbers were released, Daco pointed to a “high degree of uncertainty.” He also said that April might turn out to be a “ ‘breather’ month” for the economy, before strong job growth resumed over the summer. Despite the prescience of this warning, I quickly discovered that Daco wasn’t about to congratulate himself or exaggerate the significance of the payrolls number. “I think we have to be a little humble in the face of tremendous uncertainty and tremendous churn in the labor market,” he told me. “One jobs report is not going to make or break the economy. Things are going to be bumpy from month to month. Over the summer, we still expect the economy to experience months where jobs growth is more than a million, and maybe even two million in one or two individual months.”
That’s an encouraging message, and it jibes with other recent economic indicators, which have been strong. According to an initial estimate from the Department of Commerce, the gross domestic product rose at an annual rate of 6.4 per cent in the first three months of the year. Retail sales jumped by almost ten per cent in March. Consumer confidence rose to its highest level since before the pandemic. These figures reflect a changing reality in the United States. About forty-five per cent of adults have received at least one vaccine shot; many states, including New York and California, are moving to ease their remaining restrictions on businesses; and the cash payments from the most recent relief package are bolstering the finances of many households. In short, the economic-recovery story remains very much intact. So why did the level of hiring fall back last month?
Daco pointed to many potential factors that have been cited elsewhere, including expanded unemployment benefits (some studies show that up to half of recipients are receiving benefits that are higher than their lost wages); a shortage of child care; and people’s enduring concerns about catching the virus. Because these things all influence workers’ willingness to supply labor, economists refer to them as supply-side factors. But Daco also pointed to a demand-side factor that could be having an even more significant impact: caution among employers about hiring back too many people too quickly. “Think of a restaurant that is reopening,” he said. “They might well hire a few workers at first and see if it is enough for the time being. If it isn’t, they can readjust.” An industry-by-industry breakdown of the job figures provides some support for this theory of gradual adjustment. In March, restaurants and bars added about a hundred thousand jobs on a seasonally adjusted basis. Last month, they added another hundred and eighty-seven thousand. However, total employment in the industry is still 2.8 million below where it was in February of 2020. Similar trends are visible in other industries, including retail, where employment fell by fifteen thousand in April after a gain of twenty-three thousand in March.
Looking ahead, the key question is whether the slowdown in job growth represents a one-off or something more enduring. Between February and April of last year, as the lockdowns began, the percentage of working-age Americans who were employed or looking for work fell from 63.4 per cent to 60.2 per cent—an unprecedented decline in such a short period. Since then, the labor-force-participation rate has rebounded, to 61.7 per cent, which means that less than half of the COVID-19 plunge has been reversed. Even as the pandemic recedes, it is possible that many Americans who dropped out of the labor force in 2020 will never return. But it’s also perfectly possible that this danger is being overplayed. If infections and hospitalizations continue to decline, nervousness about the virus should decline, too. As more schools fully reopen, child care may become less of an issue. The federal supplements to unemployment benefits are scheduled to expire in September, and some Republican-run states are likely to suspend them even before then. Meanwhile, many employers are eagerly looking for new hires. Labor “supply is eventually going to respond,” Daco said. “If the labor market is red-hot and people see opportunity, they are eventually going to jump back in.” On this basis, he is predicting that the economy will create a total of eight million jobs in 2021, and that the unemployment rate will fall to 4.3 per cent by December.
Given the precarious nature of economic forecasting, these predictions could be overly optimistic or else too cautious. But whatever happens, Daco’s injunction not to place too much importance on a single employment report is worth remembering. What matters is the trend, and in the three months since the start of February, job growth has averaged five hundred and twenty-four thousand a month, as the White House Council of Economic Advisers pointed out on Friday. That figure indicates that the economy is rebounding strongly from the pandemic, and, this time next month, when the Labor Department releases the jobs report for May, it is likely to show a substantial pickup in hiring as that rebound continues. But don’t bet your house on a specific figure. The U.S. economy has been surprising us at every turn since the coronavirus struck. It could do it again.
