The good news: The U.S. just added 4.8 million jobs. Here’s the bad news

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In the annals of economic surprises, the news that the U.S. added 2.7 million jobs in May, marking an astounding reversal from COVID-19’s crushing blow to employment, was one for the ages. Few predicted that such a momental jump could be repeated, let alone surpassed in the next month, but the seemingly impossible just happened. At 8:30 a.m. on July 2, the U.S. Department of Labor announced that 4.8 million more Americans returned to work in June. That almost doubles the May dazzler, itself an all-time record, and beats any monthly number in history prior to the pandemic by a margin of 4 to 1.

Predictably, the stock market cheered, the S&P jumping 35 points, or 1.15%, by midmorning on Thursday to stand within 3% of where it started the year, as the Nasdaq notched another all-time high. The jobs jump is as heartening as it is stunning. But to stage a full comeback, to restore America’s consumer spending and confidence to the robust levels that prevailed before the crisis, the U.S. needs to get back to the pre-pandemic jobless rate of 5% or below.

Put simply, we’re now benefiting from the easy part, adding millions of positions in retail, restaurants, and hotels as the economy (albeit haltingly) reopens. Many of those jobs that vanished so quickly are returning far faster than predicted. Nevertheless, for many of the “temporarily unemployed” in hospitality, stores, and health care, getting back to work will be a long slog. And for folks who were just plain laid off, with no prospect of being rehired, the road will be even longer and tougher.

In fact, returning to 5% unemployment will probably take another five years, according to an analysis by Chris Rands, a fixed-income portfolio manager at Nikko Asset Management. Rands presents the most logical forecast this reporter has seen on how fast jobs will return. His outlook calls for a two-stage recovery consisting of the strong bounce back that’s unprecedented because it follows a collapse that’s also unprecedented, followed by grinding gains that reflect America’s much slower historical pattern for growing the employment. So let’s dig into Rands’ analysis, updated for the big gains posted in the June report.

Two categories of jobs

It’s instructive to review how suddenly and deeply the jobs picture collapsed, and how much ground it has retraced. In March and April, U.S. employment dropped from roughly 158 million to 137 million, a loss of 20.6 million jobs that quadrupled the unemployment rate, from 3.5% to 14.3%. The gains in May pushed the shrinkage to 18.3 million. Still, that’s twice the damage reached at the depths of the Great Recession.

Rands points to the gap between both the rise in joblessness, and prospects for recovery, in the two categories of the unemployed: what the Department of Labor calls “on temporary layoff” and “not on temporary layoff.” The first group consists mainly of service workers in such sectors as restaurants, stores, and airlines where business suffered the most sweeping shutdowns. Those now on the sidelines believe they’ll be rehired quickly, and for good reason: It’s already happening in a big way. The second cohort, “not on temporary layoff,” is made up of folks who lost their jobs and have no idea when they’ll get back to work.

In January, the “temporary” count was just 742,000, much lower than the “non-temporaries” at 1.9 million. But in a reversal that stands out even in these times of surreal data, the “temporary” contingent by April jumped by over 17 million to 18.1 million, or 25-fold, and the “non-temporary” group rose by 500,000 to 2.6 million. In May, the big improvement came only for the “temporaries,” as their number declined to 15.3 million. The no-job-in-sight crowd lost more ground.

Different rates of rebound

Rands’ study is based on the May numbers, but with his permission, I’ve updated his analysis for the hugely positive data for June. His model predicts that as the economy reopens, all of the jobs created in the next six months to a year will go to the “temporary” people who dominate the “reopening” sectors recovering right now. He figures that in that period, roughly three-quarters of that group will be working again. If so, 11.6 million of the 15.3 million in that camp who were jobless in May will find employment by mid-2021 at the latest.

It was the temporary group that made all of the gains in June, continuing the trend from May. The folks that see themselves as quickly returning regained 4.8 million jobs. By contrast, the “not on temporaries” saw their numbers swell to 3.71 million from 2.95 million in June.

Things are improving fast for the customer-facing employees whose bars and shops shut down fastest and are who are now serving drinks and burgers, giving haircuts, selling sports shoes, and managing boutiques. In May and June, “retail trade” added 1.1 million jobs, and leisure and hospitality a staggering 2.5 million, while health care—benefiting from a ramping up in elective procedures—restored 800,000 positions. Employees at airlines or commercial construction are seeing only trudging progress that portends a much slower return to work.

A slow slog back to 5%

Let’s update Rands’ figures for the June report. Of the 11.6 million he’s expecting to win back their jobs in six months to a year, 4.8 million got there in June alone. “It is happening more quickly than I expected,” he told Fortune. Still, Rands believes that the June surprise doesn’t change the numbers in the temporary category who will remain unemployed, probably at least until mid-2021. His best estimate of the jobless in the “temp” ranks a year hence is still the one-quarter of May’s 15.3 million, or 3.8 million. Add to that group the 3.7 million “not on temporary” cohort with no current prospects for a job.

That brings the total likely to remain unemployed by mid-2021 to 7.5 million, for a rate of 7% to 8%. That’s still more than double the figure at the start of 2020.

Here’s the crucial question for America’s economic future: Once three out of four of those who expect to be rehired quickly return, how long will it take to whittle down the hard core that remains jobless? The key target is the 5% that generally represents full employment and signals healthy growth. Rands points out that in a recovery, the U.S. generally adds between 150,000 and 200,000 jobs a month. He believes that after the initial surge, the job creation will return to that historic pace.

The slow recovery from the Great Recession, he says, provides a useful guide. “It took seven years from when the Fed took rates to zero to achieve 5% unemployment in 2015,” he says. Rands predicts that in an optimistic scenario, it will take the U.S. three to five years, starting in mid-2021, to once again achieve that target. He believes that the Fed’s prediction that unemployment will return to 5% in 2022 is way too optimistic. More likely, the Fed will be forced to hold rates at zero to wrestle down the jobless rate for several years to come.

Of course, a lot could go wrong that would drag out that timetable. Already the opening of bars, restaurants, stores, and airline flights has started to be pushed back, or even reversed in some states. Meaning it’s time for everyone to get realistic about how long it will take us to get to anywhere near the great job numbers that seemed our destiny six months—and an economic age—ago.

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