HIGHLIGHTS OF THE WEEK
- Investors appeared to shrug off some recent concerning developments, focusing instead on the reopening of the economy and nascent signs of growth. Economic data offered some support to this narrative.
- While jobless claims data had continued to point to a rise in unemployment, the May payrolls report showed a gain of 2.5 million jobs, blowing expectations out of the water. The unemployment rate fell to 13.3% from 14.7% in April.
- Other data reports, such as the ISM surveys and vehicle sales, also showed signs of improvement.
America Starts Getting Back to Work Sooner than Expected
Before the release of the payrolls report this morning, economic and financial news this week had generally taken second stage to mass demonstrations throughout the country. While noble in their cause and peaceful in their core, the demonstrations were unfortunately followed by violence, destruction and looting. The unrest, which will add to the woes for many businesses that were already struggling due the pandemic, appeared to have dissipated by the end of the week.
On the external front, U.S-China relations also showed signs of friction. After the U.S. announced a host of measures against Beijing last Friday, this week, it was reported that state-controlled Chinese companies had cancelled several shipments of U.S. farm products. The airline industry marked another flare up. The U.S. threatened to bar Chinese passenger flights into the country, though it later scrapped this plan. These developments warrant attention, because, as recent history has shown, they can pose a major downside risk to the outlook.
Investors appeared to shrug off the dour news, focusing instead on the reopening of the economy and nascent signs of growth. Economic data offered some support to this narrative. After a major deterioration in April, both of the ISM indices improved in May, with the weightier non-manufacturing index coming in better than expected. Despite the uptick, both indices are still in contractionary territory (Chart 1). U.S. vehicles sales echoed a similar message, coming in a bit better than expected (up nearly 40% m/m), though at 12.2 million the level of sales remains well below pre-pandemic levels.
The highlight of the week was the payrolls report. While weekly jobless claims data pointed to a rise in unemployment, the May report showed an impressive gain of 2.5 million jobs, blowing expectations out of the water (Chart 2). The improvement was due entirely to a decline in the number of workers on temporary layoff, which fell by a nearly equal amount (-2.7 million) as Americans were called back to work. Most sectors recorded an improvement in May. The hard-hit leisure and hospitality sector (+1.2 million) accounted for about half of total job gains.
As employment rose, the unemployment rate fell to 13.3% from 14.7% the month prior. That said, this headline rate still undercounts some of the damage caused by COVID-19. For instance, had the labor force remained unchanged from its February level, the unemployment rate would have been 16.8%. With states poised to continue reopening their economies, the labor market is expected to gain further ground.
All in all, this week’s data indicate that the worst of the pandemic’s shock may be behind us. But with the path forward still contingent on that of the virus, we’re not quite out of the woods just yet.
Admir Kolaj, Economist | 416-944-6318
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.