Economist are often lumped in with weathermen as being notoriously bad at predictions, and it’s understood that forecasts are often incorrect. Even given that, to say the May Jobs Report surprised investors and the market is probably an understatement, and the word shocked seems more accurate!
Market expectations were for the economy to lose 7-9 million jobs and for the unemployment rate to increase to 19-20%. Instead the U.S. Bureau of Labor Statistics reported last Friday morning that the economy added 2.5 million jobs and the unemployment rate fell to 13.3%. We don’t ever recall seeing consensus estimates being so far off. Some reports in the financial media have even described it as the biggest forecasting error ever.
To put the level of surprise in stock market terms, the Dow Jones Industrial Average jumped over 800 points or 3.2% on Friday, while the NASDAQ Composite gained 2.1%, and the Standard & Poor’s 500 Index added 2.6%. For the week the gains were even more impressive, with the Dow up an eye-catching 6.8%, the NASDAQ up 3.4% and the S&P up 4.9%.
All of this leads to the question, how were the estimates so wrong?
For starters, economist’s models likely underestimated the impact of the PPP (Paycheck Protection Program) for bringing back jobs. The program gave loans to small businesses that do not have to be paid back if most of the money went to keep or rehire employees. Many economists were expecting a large impact from the PPP in June, while underestimating the effect it would have in May. According to the BLS, over half of the monthly job gains came from “employment in food services and drinking places” (meaning restaurants and bars), and these businesses were large beneficiaries of the PPP.
Also, we are in unprecedented times and the numbers and data collection may have went a bit haywire during the pandemic. Economists are not used to predicting job totals and losses/gains after a black swan event like the coronavirus pandemic and economic shutdown. For example, the BLS discussed a “misclassification error” at the end of their report. To sum it up, a number of individuals who should have been classified as unemployed, were instead classified as employed but “absent” due to “other reasons”. If these workers were (properly) classified as unemployed the overall employment rate would have been about 3% higher.
An additional difficulty due to the pandemic is that there was a lower response rate to the government’s household survey and establishment survey. With less responses from individuals and companies, there is more room for error/deviation in the statistical calculations. Big picture, it is also important to keep in mind this was only one data point and a single monthly number does not make a trend. There are still a devastating number of Americans unemployed (over 20 million) and it remains unclear if and when they will get their jobs back. It is still far too early to declare “mission accomplished” on the jobs front, although the month of May was certainly a good start.
Bottom line – despite some of the nuances, there is no doubt this was a very strong jobs report and the market received a very pleasant surprise shock last Friday morning!
Looking to the week ahead, Friday’s rally is carrying through to today (so far), with the Dow up another approximately 250 points. The Federal Open Market Committee (FOMC) will announce its policy decision on Wednesday afternoon and the market will of course be “reading the tea leaves”. Also of note, the Univ. of Michigan Consumer Sentiment number is due out on Friday, where expectations are for an improvement to 76 – so we’ll see what happens with that data!
All the best – Southport Station Financial Management, LLC