Economists making forecasts are regularly warned against using anecdotal evidence -- just because your neighbour splashed seven large on an 80-inch outdoor TV last month, that doesn't mean national retail sales numbers are going to be strong. For the most part that's good advice, but not getting caught up in anecdotes doesn't mean that you have to walk around with your eyes shut. The stunning failure of the Wall Street and Bay Street experts to predict today's US and Canadian employment data suggests that's exactly what has happened.
Let's start with the US, where the Bureau of Labor Statistics reported that the economy added 2.5 million jobs in May, dropping the unemployment rate to 13.3 percent. Considering that forecasters had been looking for the loss of several million more jobs and an unemployment rate of 20 percent, that's quite startling. We have been regularly reading about the fact that "40 million Americans have lost their jobs", an entirely bogus number obtained by summing the weekly initial claims data; it turns out the actual number of unemployed as of mid-May was 21 million!
The BLS report notes that the job gains are widely spread across different sectors of the economy, with leisure, construction and retail all showing strong gains. The only laggard is, oddly enough, the public sector. The opening-up of state economies throughout the month, alongside stories such as Walmart hiring 250,000 workers across the country, seems to have completely escaped the attention of the prognosticators. It's slightly surprising that the impact of these developments has shown up so soon, but the general direction should have been apparent -- see my post "It's a start" back on 28 May.
It's a similar story for Canada, where the economy demolished experts' gloomy expectations by adding 290,000 jobs in May, the vast majority of them full-time. The number of employees working severely reduced hours also fell sharply. Paradoxically, the unemployment rate rose to a record 13.7 percent, thanks to a big jump in labour force participation. In assessing this "record" number, keep in mind that the data series only goes back to 1976; things were surely much worse in the 1930s.
A quick look at the details of the data shows the significance of paying attention to what's going on. The strongest job gains were seen in Quebec (up more than 230,000), BC and Alberta, which have been easing lockdowns since the start of May. In contrast Ontario, which is being more cautious, saw a further loss of 65,000 jobs in the month. Just about the only economist to have got this right is a guy at Desjardins in Montreal, who presumably noticed things changing all around -- well done him!
We should not extrapolate from this one number, advice already lost on Donald Trump, who is portraying the US data as not just a V but a "rocket ship". Both the BLS and StatsCan are cautioning that the definition of unemployment is a bit slippery these days. To see why, just consider what has happened in recent weeks at Air Canada, That company grounded most of its fleet and laid off half its staff, only to hire them back when the government's emergency wage supports came into play. Then it promptly furloughed them, while announcing plans to lay them off again as it looks to emerge from the pandemic as a much smaller airline. How can a statistician accurately account for that?
The lesson to be taken from this and other similar stories is that for the next few months, two contrasting trends will be at play in the employment data. The reopening of states and provinces is set to continue, and that will lead to further hiring of the kind we have just seen for the month of May. At the same time, many firms will be looking to downsize for the new reality they will be facing post-pandemic; that will transform thousands of today's furloughs into more permanent job losses. We will climb out of the chasm much more slowly than we plunged into it, and the landscape on the other side promises to be quite different.
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