• Pierre Fournier

Labor Market Going Back to Life in May

By Professor Pierre Fournier

Canadian and U.S. stock indexes have rebounded sharply from a Coronavirus-driven crash in March as investors bet on a revival in business activity following the easing of a nationwide lockdown. Data from the U.S. Labor Department showed the unemployment rate unexpectedly fell to 13.3 percent in May from 14.7 percent in April. Canadian employment increased by about 290,000 positions in May, the biggest gain in Statistics Canada’s data set that goes back to 1976. Quebec accounted for most of the job gains, a positive sign for the rest of the country as Premier François Legault gave permission for factories and construction sites to reopen earlier than most of his counterparts. The Quebec experience suggests that at least some of the ground lost since February will be quickly made up over the second half of the year. It’s a very positive and a far better-than-expected report. The unemployment rate was likely to peak in May and then get better from there, but it looks as if it might have peaked in April, which is a very positive development for the economy. The better-than-expected report suggests that the government's programs to cushion the blow to the labor market are working. According to Statistics Canada, by mid-May, 179,000 businesses had applied for the government’s 75 percent wage subsidy program. The pace of applications to Canada’s Emergency Response Benefits program has also decelerated in recent weeks, suggesting the worst of the layoffs and job losses is over. It is a relief to policymakers who had been scrambling to inject hundreds of billions in cash into the economy to keep it afloat. The strong jobs report is admittedly just a single month of good news. But I think the jobs data for June, that will be reported in early July, will show more momentum. That will be good for corporate earnings and stock prices. In reference to my last article, I got the job forecasts wrong because I underestimated how many people were returning to work and did not recognize how there are some parts of the country where Covid-19 cases haven't been as big of an issue as they are in major cities. The healing process is underway and it's sooner than I expected. The worst of the damage in the economy and market may be over -- this is highly encouraging. But it will take more than green shoots to puncture the gloom caused by a disease that has killed more than 380,000 people around the world, pushed millions of workers out of the labour market, and forced thousands of companies out of business.

Still considerable ground to recover

The surprisingly positive readings on employment paint a more optimistic picture of the early part of the recovery, but there’s still a long road back. Important industries may have "cloudy days ahead". Bombardier will cut approximately 2,500 positions from its aviation workforce due to challenges caused by the COVID-19 pandemic, the company announced Friday. The job cuts will be carried out throughout the course of the year and will mostly impact manufacturing operations in Canada. Bombardier said global industry-wide business jet deliveries are expected to sink 30 percent year-over-year as the novel Coronavirus batters demand. Bombardier said it expects to take a US$40-million charge as a result of the workforce reduction. Overall, the group employs nearly 60,000. The aviation industry has been among the worst bit by the pandemic which has dented travel demand and forced several aircraft manufacturers, including planemakers Boeing and Airbus, to cut production as customers defer deliveries. Consumer behaviour probably changed during the lockdowns, and important industries may have permanently shrunk. Retail, hospitality, and tourism won’t be the same and their evolution will dictate the force of the recovery.

The gap between Main Street and Wall Street

The gap between Main Street and Wall Street has never seemed wider. Since it bottomed on March 23th, the S&P 500 has shot up almost 40% - the highest return over so short a period since 1933, according to S&P Dow Jones indices. Meanwhile, 108,000 Americans have died in a pandemic, 21 million are out of work and the USA is seething with civil unrest. We know the reopening process is going to be long and difficult, and there could easily be setbacks but it`s encouraging to see progress. Nevertheless, investors need to be cautious. The stock market has clearly forecast a V-shaped recovery and it may be a little ahead of itself. The economic comeback will still be slow and gradual.

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