October US Employment Report

US Election

Please note that this portion was written on Friday, November 6, 2020

Joe Biden is expected to speak tonight and declare victory as he is on the verge of winning three out of the four states still in play, which will push him over the 270 votes needed in the Electoral College to become President. Biden only needs to win one state. Trump needs to win all four states and he is leading in only one. It’s close to a certainty that Biden will win the race.

But while Biden may be able to claim the victory in the Electoral College, it’s not over yet, and it could go on for a while. Technically, the Electoral College doesn’t even meet until December 14^th. And the Trump campaign, as expected, has filed several lawsuits over the validity of the elections in certain states. These lawsuits could be thrown out right away or they could drag on. The last contested election was in 2000, and it wasn’t legally “decided” by the Supreme Court until December 12th.

But let’s assume Biden wins, then what becomes really important is the Senate race which now looks like it will result in a Republican majority (but it’s irritatingly close). As my colleagues in Europe have noted, in the current situation, divided government may make it more difficult to coherently attack the COVID-19 crisis, and to get that desperately needed fiscal stimulus and income support package. Historically speaking though, divided government is the best configuration over the long term. It promotes the status quo which provides certainty, and the stock market does very well with certainty. And it usually means the economy does well too. A Republican Senate will likely result in more business-friendly conditions than a Democratic sweep would. Democrats ran on agenda of tax increases and more regulation, so a Republican Senate will check those efforts.

View Euler Hermes Scenarios of Contested Election.

US Employment Report

The October 2020 employment report was very strong all around. The economy gained 638,000 jobs vs expectations of 530,000, while the unemployment rate plummeted from 7.9% to 6.9%, much better than expectations of 7.6%. All industries except for one gained jobs. The single loser was educational services which shed an insignificant 22,000 jobs as some teachers have still haven’t returned to school. The labor force participation rate rose sharply, going from 61.4% to 61.7%. The employment/population ratio jumped from 56.6% to 57.4%; since this measure tells us the portion of the population that is working to fuel the economy, it’s a very good indicator of the health of the labor market and the economy in general. Overall, it’s a very solid report.

But we are still way in the hole, and slowing. October was the fourth consecutive month of slowing job gains. We have only recovered 12,070,000 of the 22,160,000 jobs lost in March and April or 54.5%. By comparison, the Canadian economy has regained 78.8% of the jobs lost there (more below). And job gains here in the US are likely to continue to slow for several reasons:

• The resurgence in COVID-19 (see below) will probably lead to some shutdowns again.
• Income is about to fall off a cliff for those receiving unemployment benefits (see last week’s email), so consumption will continue to slow, leading to less demand for labor.
• Temporary holiday hiring in November and December will be substantially less this year because of restrictions on brick and mortar stores. Seasonal adjustments could artificially hold down employment in retail in those reports.

Bottom line: A very good report, a long way to go, and some serious headwinds.

Canada Employment Report

The Canadian economy created 83,600 jobs in October, well above the consensus of 75,000. The unemployment rate fell a shade from 9.0% to 8.9%. Other details were quite positive as 69,100 jobs were full time, 76,300 were in the private sector, and hours worked rose a hearty +0.8% m/m.

As noted above, the Canadian economy is recovering much more quickly than the US’s. Canada has regained 78.8% of all the jobs lost, and the labor force participation rate at 65.2% has come almost all the way back to February’s 65.5%. Some of the reasons that Canada is recovering more quickly than the US are related to COVID-19: Canada has a much lower population density, restrictions started early and were more stringent and were complied with better, and reopenings were staggered.

But now COVID-19 is showing in the data again and unfortunately points to slowing gains going forward, just as in the US. Renewed restrictions cut 48,200 jobs in the hotel and restaurant industry, and those restrictions are almost certainly going to increase. In fact in Quebec, which was the first province to start re-imposing restrictions, 12,900 jobs were lost.

Bottom line: A very good report, well on the way to recovery, but with some serious headwinds.

COVID-19

While the political and job developments may be positive, COVID-19 continues to come roaring back. The health experts said it would come back as the temperatures started to fall, but I don’t think they expected it to start increasing so rapidly. COVID-19 is rampaging through Europe, rising very sharply in the US, and has not left Canada untouched. I’ve included a bunch of charts below that spell out the situation. In some of them, I have isolated just the US and Canada for clarity. While each one says something different, the point of them collectively is that restrictions are likely coming.

To summarize

• The likely combination of a Biden Presidency, a Democratic House, and a Republican Senate may make governing difficult for a while, but in the long run, it has historically been quite a good combination for the economy and financial markets. But we are not quite there yet and it could take a while.
• The US employment report was very good but we are still deep in a hole, with headwinds.
• The Canadian employment report was also very good, and the labor market is recovering much more quickly than in the US, but it is also facing headwinds.
• I wish I didn’t have to tell you about COVID-19.