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The Biggest Payroll Surprise in History

With the economy reopening, and the anticipated economic recovery beginning to appear, it is no surprise that the market keeps heading higher.  Perhaps the most important data point this week was the jobs report which clearly showed not only has the unemployment rate bottomed but is now on the mend.  While we’re not out of the woods yet, it does appear that the worst is behind us.

Let’s start with the best news this week. Today we learned that U.S. jobs unexpectedly increased in May. May nonfarm payrolls increased by 2.5 million versus the consensus of another 8 million decline. Unemployment, which was expected to top 20% in May, actually fell from 14.7% to 13.3%. Not one economist, in a Bloomberg survey, expected an increase in jobs in May. This is good news on two fronts. Not only are we seeing the reopening take hold, but it also puts to bed the theory that employees collecting unemployment wouldn’t want to come back to work until the end of July when their benefits run out. Like I said above, we’re not out of the woods yet, but this one data point has huge implications for the near future.

Even though the data shows improvement, Congress and the White House continue to work on another stimulus package. This is a bipartisan effort, with each party having a separate idea of where the money needs to go and just who needs the relief. The number being reported is north of a trillion dollars, although after today’s jobs report it could come in substantially lower. Among those looking for aid is the semiconductor industry which is lobbying for $37 billion in federal funding to help subsidize the construction of new chip factories, aid for states trying to attract semiconductor investment, and increased research funding. Expect for this round of stimulus to occur in the July/August time frame.

While we’re pleased the economy is reopening, it is clear that work as we know it has subtly changed. Many believe that employers, realizing cost savings, will continue to keep a portion of their employees working from home. Other signs indicate that perhaps not all the jobs lost will return. For example, GM expects to emerge from the pandemic with a “permanently reduced cost basis after it moved aggressively to reduce its cash burn.” Starbucks is adjusting employee hours to match expectations that same-store sales in the U.S. won’t bounce back until at least this fall. Microsoft announced it is replacing human editors with artificial intelligence (AI). The pandemic may have facilitated and perhaps even hastened the transformation that started a couple decades ago.

In closing, let’s turn to a story I came across this week that could be great news or not depending on your personal beliefs. Genetic engineering is a very controversial technique for bending the world as we know it, into something else. Coral reefs that can withstand rising sea temperatures, American chestnut trees that can survive blight, and mosquitoes that can’t spread disease are examples of how genetic engineering may transform the natural world. This week, a company named Oxitec has been granted approval by the U.S. Environmental Protection Agency (EPA) to release millions of genetically modified mosquitos over the next two years in Florida and Texas. The female sex of this mosquito spreads many illnesses including dengue, Zika, and yellow fever. When lab bred, genetically modified males are released and mate, their female offspring die. If this goes according to plan, it should eventually cause the collapse of the wild population. What could go wrong? Now you know.

Bruce J. Mason, MBA