US Macro: Low-hanging fruit in labour market gains is largely behind us – Last Friday’s payrolls report showed that, despite a relatively small increase in payrolls of 49k, the unemployment rate continued to fall at a rapid clip, to 6.3% from 6.7% in December.

This reflects both a renewed (albeit modest) fall in participation, as well as methodological differences between the household and establishment surveys that have been prominent throughout the pandemic. In the coming months, payroll gains are likely to pick up significantly, driven by recent restaurant reopenings in California and New York, and fewer capacity restrictions in other states.

With that said, a likely recovery in participation will reduce the downward pressure this has on the unemployment rate. We see unemployment ending the year at 5.8% – a relatively modest decline compared to the gyrations we have seen over the past year.

Supportive of the labour market will be the ongoing reopening of the economy, as well as the huge amount of fiscal support – both already enacted but also in the pipeline.

However, most of the ‘low-hanging fruit’ in labour market gains has already happened; 15m of the total 17m temporarily furloughed staff since the start of the pandemic have returned to their old jobs, leaving around 2m furloughs remaining. The other 2.3m in (newly) unemployed are permanent layoffs, and some of the currently furloughed staff are likely to join the ranks of these permanent layoffs as the economy adjusts to the post-pandemic new normal.

Indeed, some of the changes brought about by the pandemic – such as increased home working and reduced business travel – are likely to prove structural in nature. Workers that are dependent on such pre-pandemic patterns of demand, such as those in the hospitality sector in business districts, are likely to be more vulnerable to being permanently laid off. This more frictional unemployment will take longer to fall, with retraining and reskilling likely necessary.

While the fall in the unemployment rate will probably be much more gradual over the coming year, it should regain momentum next year. This should see the US economy back at full employment in the course of 2023. See our 2021 US Outlook, published today, for more.