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Key Points for the Week

  • The U.S. economy added only 266,000 jobs compared to consensus expectations of nearly 1 million in April. In addition, the March job figures were revised lower.
  • Seasonal adjustments, obligations to care for children or the elderly, and incentives not to work are all reasons cited for poor employment report.
  • The weekly initial jobless claims fell to 498,000 and pushed the measure below 500,000.

Economists estimated 975,000 new jobs would be created in April. The United States Bureau of Labor Statistics (BLS) reported there were just 266,000. That’s a big miss.

Economists, analysts, and the media offered a wealth of theories to explain the shortfall. These included:

  • Pandemic fear. A March U.S. Census survey found 4.2 million people aren’t working because they fear getting or spreading the coronavirus, reported Gwynn Guilford of The Wall Street Journal. That’s more than half of the 8.2 million non-farm jobs that need to be recovered to reach pre-pandemic employment levels.
  • Too-generous unemployment benefits. Another theory is federal unemployment benefits ($300 a week) have created a labor shortage. The theory is being tested. Last week, Montana announced it will no longer participate in federal unemployment programs. Instead, it will offer a $1,200 return-to-work bonus, reported Greg Iacurci of CNBC. Subsequently four other states have announced that they are withdrawing from the federal program.
  • Low pay. Some say Americans are less willing to work for low pay than they were before the pandemic. Christopher Rugaber of the AP interviewed a Texas staffing office manager who reported job seekers are turning down jobs that pay less than unemployment benefits.

A former retail worker told Heather Long of The Washington Post:

The problem is we are not making enough money to make it worth it to go back to these jobs that are difficult and dirty and usually thankless. You’re getting yelled at and disrespected all day.

A former retail worker told Heather Long of The Washington Post

  • Lack of childcare. Many women who want to work left jobs during the pandemic to care for children. The April employment report showed a slight decrease in the rate of unemployment for adult women; however, it resulted from women giving up on job searches rather than finding work. The Institute for Women’s Policy Research reported, “…more women continued to exit rather than enter the workforce: 165,000 fewer women had jobs or were actively looking for work in April than in March.”
  • Quirky data. Statistical distortions or seasonal factors could be responsible. “The more time the market has to digest [the] report, the more the report seems a bit of an anomaly relative to other data,” said a deputy chief investment officer cited by Mamta Badkar and Naomi Rovnick of Financial Times.

Other data include the ADP® National Employment Report™ which showed 742,000 new jobs in April. The report reflects real-time data on one-fifth of U.S. private payroll employment.

  • Rethinking work. “There is also growing evidence – both anecdotal and in surveys – that a lot of people want to do something different with their lives than they did before the pandemic. The coronavirus outbreak has had a dramatic psychological effect on workers, and people are reassessing what they want to do and how they want to work, whether in an office, at home, or some hybrid combination,” reported The Washington Post.

U.S. financial markets shrugged off the news. The Standard & Poor’s 500 Index finished the week at a record high, and 10-year Treasury rates finished Friday where they started.

This Week in the Markets

The U.S. job market added only 266,000 jobs in April, missing expectations that there would be at least 1 million jobs created. March’s jobs gain, of more than 900,000 new jobs, was revised down to 770,000. The data show the U.S. job market slowed rather than accelerated in April. The leisure and hospitality industry experienced the biggest gains, adding more than 331,000 jobs. Unemployment increased to 6.1% as more workers reentered the labor force and more people became fully vaccinated. The timelier initial jobless claims report fell below 500,000 for the first time since the pandemic began.

Many reasons were cited for the weak jobs performance as prognosticators and politicians seemed surprised by the data. Most economic data are adjusted for seasonal trends to improve comparisons between months. Those adjustments pushed employment gains lower. Some argued enhanced unemployment benefits made getting a job less lucrative for many. Others pointed to parents staying home to care for their children because many school districts have not reopened to in-person education. Even taking the explanations into account, what was expected to be a ferocious recovery turned out to be far too tame.

The S&P 500 rallied last week as the lower-than-expected job growth pushed out predictions of any interest-rate tightening by the Federal Reserve. The global MSCI ACWI also gained. The Bloomberg BarCap Aggregate Bond Index climbed as lower rate expectations supported bond prices.

Retail sales in the U.S. and Australia along with U.S. industrial production data will provide insight into the strength of the consumer and manufacturing. For those concerned about inflation, consumer prices in China and the U.S. will also be released this week.

Help Needed

The U.S. economy added or recovered far fewer jobs than expected last month, producing a mere 266,000 new jobs. In a normal month, that would be very strong, but not amazing. During a period when stimulus checks and vaccine shots were flowing, it is extremely disappointing.

The poor results produced some humorous moments. On CNBC, minutes before the results were announced, the host asked the panel of experts for their expectations. The group was optimistic. Estimates ranged from 1.15 million to 1.50 million new jobs. When the data came out, the actual number was so much smaller than expected the reporter thought it might be an error. Also, the combination of more people reentering the labor force and the weak jobs report pushed unemployment up to 6.1%.

Bonus unemployment benefits were cited by the U.S. Chamber of Commerce for the weak data report. Many reports included anecdotal evidence of businesses unable to attract workers they wanted to hire. Companies seemed to compensate by raising hours worked and in some cases increasing salaries. The average work week increased by 0.1 hours, and salaries increased 0.9% in just one month. The wage gains were surprising in a month when many of the new jobs were in traditionally lower-paying industries, such as leisure and hospitality.

Schools remaining closed have pressured many families to cut back the number of people working and, for some, the number of jobs they work. Elder care is also keeping more people at home during the pandemic. The percentage of working-age males in the economy grew 0.3% last month, but it was flat for women, who seem to be the ones staying home more often.

Considering all these factors, it was still a poor report, and the disappointing results underscore how hard it is to predict or shape a massive economy. As Federal Reserve Chair Jerome Powell noted months ago, “Forecasters need to be humble and have a great deal to be humble about, frankly.”

The stakes for the May report are now high. Multiple large stimulus bills have passed, and the expectations for how those bills would affect growth were not met in April. Wage increases also raised the risk of modestly higher inflation, although this would be welcome as lower-wage positions were catching up with the gains for higher-wage earners before the pandemic.

Compounding the potential problems for policymakers, inflation came in higher than expected. Rising inflation, coupled with rising unemployment, brings back painful memories of economic malaise that was referred to as stagflation. We are a long way from reaching that point and one month of bad data does not indicate a trend. However, we will need to pay careful attention to future economic data.

SECURE Act

When the SECURE Act was passed into law in early 2020, there were many substantial updates that affected retirement account rules that had previously been in place for years. One of the more substantial changes was the elimination of the stretch IRA for non-eligible beneficiaries. This new rule requires that most non-spousal beneficiaries of retirement accounts after January 1, 2020 must distribute the entire inherited account within 10 years of the account owner passing away. Prior to this change, beneficiaries of retirement accounts could use their own life expectancy to take distributions from the inherited account. This new 10-year rule could potentially push beneficiaries into a higher tax bracket and may require account holders and beneficiaries to review their current estate plans.

Another change in the SECURE Act was that individuals can wait until they reach the age of 72 before taking required minimum distributions. Before the SECURE Act was passed, individuals with retirement accounts were required to take distributions no later than April 1st of the year they turned 70 ½. This new age limit does not apply to individuals who turned 70 ½ before 2019.

If you have any questions about the SECURE Act and how it might affect your financial planning goals, please contact us.

Changes in Behavior

Studies of behavioral finance have found the human brain is more interested in survival than saving. “It turns out that, when it comes to money matters, we are wired to do it all wrong. Our brains have evolved over thousands of years to focus on short-term survival in a dangerous world with limited resources. They were not designed for today’s optimal financial behaviors,” wrote financial psychologist Dr. Brad Klontz, a CNBC contributor.

No one knows how the COVID-19 pandemic will be remembered over time, but it appears to have influenced the way people think about money in some significant ways. An April 2021 Bank of America survey reported:

  • 81 percent of participants saved money, that would normally be spent on entertainment, dining, and travel, and set it aside in emergency, savings, and other types of accounts.
  • 46 percent used pandemic downtime to put their finances in order.
  • 44 percent said their risk tolerance changed: 23 percent became more aggressive and 21 percent more cautious.

If the pandemic has changed your thinking, let’s review your financial plan and align it with your current circumstances and thinking.

Delays in Tax Refunds

The Taxpayer Advocate Service (TAS) has stated that it is aware that taxpayers are experiencing more refund delays this year than usual. Typically, the IRS processes electronic returns and pays refunds within 21 days of receipt. However, the high-volume of 2020 tax returns being filed daily, backlog of unprocessed 2019 paper tax returns, IRS resource issues, and technology problems are causing delays. Once a return is processed by the IRS and loaded onto the agency's systems, TAS may be able to assist with delayed refunds if taxpayers meet case acceptance criteria. TAS has a case criteria tool that can be used to determine if TAS may be able to offer assistance. www.taxpayeradvocate.irs.gov/can-tas-help-me-with-my-tax-issue/.

Be Aware of New Text Message Scam

The IRS and Security Summit have issued a warning regarding a new text message scam which cites the availability of an economic impact payment. The goal is to have the recipient reveal bank account details. If you have any questions about this scam, please contact us.

Did you Know? This Week in History

May 10, 1869: Transcontinental Railroad Completed, Unifying the United States

On May 10, 1869, the presidents of the Union Pacific and Central Pacific railroads met in Promontory, Utah, and drove a ceremonial last spike into a rail line that connected their railroads. This made transcontinental railroad travel possible for the first time in U.S. history. No longer would western-bound travelers need to take the long and dangerous journey by wagon train.

Since at least 1832, both Eastern and frontier statesmen realized a need to connect the two coasts. It was not until 1853, though, that Congress appropriated funds to survey several routes for the transcontinental railroad. The actual building of the railroad would have to wait even longer, as North-South tensions prevented Congress from reaching an agreement on where the line would begin.

Harsh winters, staggering summer heat and the lawless, rough-and-tumble conditions of newly settled western towns made conditions for the Union Pacific laborers miserable. The work force of the Central Pacific also had its fair share of problems, including brutal 12-hour work days laying tracks over the Sierra Nevada Mountains. On more than one occasion, whole crews would be lost to avalanches, or mishaps with explosives would leave several dead.

For all the adversity they suffered, the Union Pacific and Central Pacific workers were able to finish the railroad, laying nearly 2,000 miles of track by 1869, ahead of schedule and under budget. Journeys that had taken months by wagon train or weeks by boat now took only days. Their work had an immediate impact, and the years following the construction of the railway were years of rapid growth and expansion for the United States, due in large part to the speed and ease of travel that the railroad provided.

Weekly Focus

Money does not buy you happiness, but lack of money certainly buys you misery.

Daniel Kahneman, Economist, Psychologist, and Author

All that you touch, you change.

Octavia Butler, Science Fiction Author