U.S. businesses add 2.4M workers in June, plus a breakdown of what to expect from the jobs report

[00:00:00] Speaker 1: Let's get to some of the data that we got out this morning. We got a look at the labor market with the ADP report ahead of the big jobs report tomorrow morning. Now, ADP report today showing that private payrolls arose by 2.4 million in the month of June. For more on that, we have Matt Lizetti. He's a chief U.S. economist at Deutsche Bank. And Matt, help us make sense of these numbers that we're getting and really just where we stand overall with the labor markets. We had a 2.4 million of private jobs added last month. We saw that big upward revision for the month of May. What are your thoughts just about the pace of improvement that we're seeing in the labor market as we look ahead to that jobs report out tomorrow morning? [00:00:42] Matt Lizetti: Sure. And thanks very much for having me on. You know, all this data follows the May jobs report, which was significantly stronger than what people expected, and showed that the economy had likely bottomed in late April and May and began to move higher and to begin to recover. I think tomorrow we were expecting that you see 2.5 million jobs added again. That's meaningful. But we are still in a pretty significant, you know, shortfall relative to where we were in February. It would still be around 17 million jobs below where we were before. And we're expecting the unemployment rate to be around 12.5%. So you are seeing meaningful improvements, but we are still at a pretty big deficit relative to prior months. And I think most importantly, in the high frequency data, you're seeing some weakness that is occurring as states are rolling back the reopening process due to the COVID spread. [00:01:33] Speaker 1: Yeah, Matt, talking about the COVID spread here and what states are doing, obviously they're changing their plans. And that could clearly have a huge economic impact on those states. And I know you examined the small business activity, the restaurant bookings, also consumer spending in some of those areas. But how significantly do you think that this renewed spread of the virus is threatening the strength of the rebound? [00:01:54] Matt Lizetti: I think it can be very significant. You know, if you look at just the states, Florida, Texas, Arizona, California, that's around 30% of U.S. GDP. And those are areas where we're seeing a rollback in some of these reopening measures. And even before we saw that rollback, I think the most important thing is that you saw already began to see businesses and consumers retrench in terms of economic activity. You notice small business activity was declining. Restaurant bookings were declining. Broader measures of consumer spending were already declining. So rolling, you know, the coronavirus spread, the fact that we haven't got it contained, the fact that consumers and businesses were reacting to it even before we had an official rollback of economic activity. I think tomorrow we'll see the jobless claims data, and that will be a high-frequency data point that'll be, you know, nearly as important, if not more important, than the payrolls report. [00:02:47] Speaker 3: Matt, how should we be looking at, you know, this uptick that you talked about? I mean, I guess, you know, the question is that the first time around, you know, everybody sort of just stayed in place because they were told, with these strict stay-at-home measures, to do exactly what they were told, given that we didn't know a whole lot about the virus. I'm wondering if you see, from an economic standpoint, a more severe hit in terms of the prolonged process of this. In other words, if you're looking at a place like California, for example, that already went through this, only to find that it's re-emerging again, are you concerned that consumers are going to turn even more inward, save more, and not really be willing to go out and spend even when things start to die down? [00:03:28] Matt Lizetti: It is a concern. It is certainly a concern from small businesses in particular, many of whom, you know, were able to weather a month or two of not being able to receive 100% of revenue, both helped by the Paycheck Protection Program and maybe given the savings that they've had. But survey data suggests that many of these small businesses will not be able to survive if this is a more prolonged process of social distancing and receiving less than 100% of revenue. There was a Chicago Fed survey that suggested about 70% of restaurants would face financial distress, 50% of retail, and 25% or a little bit more of manufacturing. So it is absolutely a concern. It raises the question that, you know, our policy and fiscal policy needs to transition from thinking about this as a V-shaped recovery to one that is going to be more prolonged. It's going to mean that we have to re-up things like the unemployment insurance and small business support. And hopefully we will see more evidence of that over the next month. [00:04:27] Brian Chung: Hey, it's Brian Chung here. So I feel like something that's kind of lost in this V-shaped recovery argument is whether or not there are certain events that are happening that could create long-term damage. We've heard Chairman Powell talk about this with respect to productivity, for example. If you're losing a lot of these small businesses and people are sidelined on the labor market for too long, their skills mismatch when the economy does end up reopening could create a huge obstacle in getting a quick recovery. I'm wondering, are you starting to see that? Is it a wave of bankruptcies? Is it the extension of the amount of time that people are on UI that could really lead to longer-term damage that maybe investors aren't baking in right now? [00:05:06] Matt Lizetti: Yeah, you're seeing some early signs of that. In tomorrow's jobs report, we'll be able to look at those people that are temporarily unemployed versus permanent unemployed. Last month, even though the overall unemployment rate came down, those that were permanent unemployed actually moved a little bit higher. It was small, but it was noticeable in this environment. Certainly, there's a lot of evidence out there that the longer that people are unemployed, they lose attachment to the labor market, they lose experience, they lose skills, and their incomes are permanently impacted. And then I think more importantly, when you receive these big shocks, whether it was the global financial crisis, the Great Depression, and I would think even in this environment, you see something similar, it tends to impart risk aversion in households and a drive towards precautionary savings motives, which dampens consumer spending going forward. You know, we're still early to see those things, but those are the types of things that we'd be worried about impeding the recovery going forward. [00:06:01] Speaker 1: Yeah, Matt, real quick, I just want to go back to something you said earlier in regards to fiscal policy. You mentioned quickly just the importance of the unemployment insurance going forward. How critical do you think it is that the extra $600 a week in unemployment benefits is extended, and what else would you like to see included in the next measure? [00:06:19] Matt Lizetti: I think it's absolutely critical that that just does not vanish and go away. What we've seen in the data over the past several months is retail sales, retail control in particular, was actually very strong. There's very compelling evidence that that was supported by both the fiscal stimulus checks and the unemployment insurance, and lower-income households were able to boost their consumption as a result of that. If that goes away, I think that you are taking away a critical income support during a period where the recovery is still fragile. Beyond that, state and local governments, many of which are planning towards the next year, and their state budgets are taking a big hit, will likely need some support, or will have to lay off significantly more people. State and local government support, I think, is critical as well. And then small businesses. We've seen there was about $100 billion left of this Paycheck Protection Program, which was not allocated. But you have to think that many of these small businesses that did take up some of this lending early on may need to be re-upped on this the longer that the social distancing measures are in place. So those are the three things that I would be focused on, and I think you need to get them by the end of July. [00:07:32] Speaker 1: All right, Matt Lozetti, Chief U.S. Economist at Deutsche Bank. Thanks so much for taking the time to join us today. We hope to have you back. [00:07:38] Speaker 5: Hey, investors. Zach Guzman here. Are you interested in learning more about the markets and getting the latest financial news? Well, then click right here to subscribe to our Yahoo Finance YouTube channel. Get the latest up-to-the-minute market analysis, big interviews in the world of finance, and information on how to manage your money every day, wherever you are.