After big job gains in June, many economists expect a slowdown amid rising coronavirus cases – USA TODAY
Curb your enthusiasm.
The big rebound from the steepest job losses in U.S. history has gotten off to a roaring start, with a record 4.8 million jobs added to the economy in June, following 2.7 million gains the prior month. But the comeback is likely to slow significantly in the months ahead, economists say.
Job gains more muted ahead
“We expect the recovery from here will be a lot bumpier and job gains to be more muted,” says economist Michael Pearce of Capital Economics.
Ian Shepherdson, chief economist of Pantheon Macroeconomics, thinks it’s even possible payrolls could decline in July and August.
The biggest stumbling block is that 21 states, largely in the South and West, have paused or reversed their reopening plans amid a spike in cases. Many opened sooner than health guidelines dictated. New U.S. coronavirus cases passed 50,000 this week, a single-day record.
Arizona has shut down bars, gyms, theaters and water parks. South Florida and California are closing some beaches for the July 4th weekend. Texas shuttered bars, limited restaurant capacity and banned elective surgeries.
Even areas with declining cases and hospitalizations are scaling back on fears of contagion from the new hot-spot states. New York City Mayor Bill DeBlasio, for example, has delayed indoor dining indefinitely. And regardless of state restrictions, many consumers avoid public gathering spots when they learn of infection surges.
Blockbuster job gains: 4.8M jobs added and unemployment falls to 11.1% as more states reopen after COVID-19 shutdowns
The pullbacks are showing up in some real-time data. Kronos, which tracks worker shifts, says growth in that metric slowed from 9% in May to 6% in June, with shifts falling in Florida, South Carolina and Illinois the past few weeks. Hours worked at small businesses have plateaued the past couple of weeks after rising steadily since mid-April, and that trend is likely to continue or worsen, according to Homebase, a provider of scheduling software.
And Open Table has recorded a sharp drop in restaurant reservations in the Houston area, notes Diane Swonk, chief economist of accounting firm Grant Thornton.
“It will not be long before businesses in the worst affected areas are forced to shutter, at least temporarily,” she says.
Government aid runs dry
There are other factors. Some of the millions of small businesses that received forgivable federal loans as long as they retained or rehired staffers may be laying off workers now that the funds have run dry, according to Oxford Economics. That so-called Payment Protection Program also likely pulled forward employee callbacks that would have occurred in later months, Barclays says.
Some businesses, meanwhile, are permanently cutting ties with workers after waiting several months to assess the economy’s course. In June, 35% of officially reported layoffs in California were permanent, more than twice the May level, Oxford notes.
Those trends will make it even tougher for the economy to recoup historic, crisis-induced job losses. The 7.5 million jobs recovered in May and June represent just a third of the unprecedented 22.1 million shed in March and April, leaving total U.S. employment 14.7 million jobs below the pre-pandemic peak.
Jobless claims remain high
Initial jobless claims – a rough measure of layoffs – have remained stubbornly high, totaling 1.4 million the week ending June 27 and topping a mind-boggling 48 million over the past 15 weeks. Many, however, also reflect furloughs and reduced hours under expanded eligibility for unemployment benefits.
A less tangible factor is business confidence. The rebound largely has been fueled by firms that have brought back laid-off employees as government constraints eased. As that rehiring slows, net job gains will depend more heavily on new hiring as companies expand or fill open slots left by workers who quit.
Tom Gimbel, CEO of LaSalle Network, a Chicago-area staffing firm, says such hiring partly rebounded from the depths in April but has remained low. Before the pandemic, many companies were aggressively hiring new sales representatives and converting temporary contractors to permanent employees – signs of a bullish outlook.
Wine in a box: ‘Don’t tell my wine snob friends’: Why Americans are buying more boxed wine during COVID-19
Both of those activities have remained subdued, Gimbel says.
Noting that companies are unsure if consumer spending will hold up after enhanced unemployment benefits and other government aid expires, he says, “There are these big unknowns.”
Swonk says that’s why it’s vital that Congress pass a new stimulus measure.
Some are more sanguine. While coronavirus cases have spiked, they’ve largely hit young people who are less vulnerable to severe illness, and deaths in states like Texas and Florida have remained low, says economist Jacob Oubina of RBC Capital Markets.
If those trends hold, he says, “You could be at the other end of the (state) shutdowns by the time you get to the July employment report.”
Contributing: Joshua Bote and Grace Hauck
This year’s unprecedented market conditions have highlighted some of the problems with making rigid distinctions between growth stocks and value stocks. 2020 has also highlighted the incredible momentum and market-shaping power of the tech sector.
Despite playing host to many companies with highly growth-dependent valuations, tech has proven more resilient than any other industry amid the uncertainty and volatility created by the coronavirus pandemic. Take a look at the performance of the Nasdaq 100 Technology Sector index compared to the S&P 500 index and the DJIA to put this in perspective:
High-quality tech companies that can shape and benefit from influential trends have the potential to post explosive growth over the long term, and the defensive value that these types of businesses can also add to a portfolio has never been more clear. Here’s why investors seeking stocks that can deliver big growth and thrive through adversity should consider adding StoneCo (NASDAQ:STNE), CrowdStrike Holdings (NASDAQ:CRWD), and Zynga (NASDAQ:ZNGA) to their portfolios.
Image source: Getty Images.
1. StoneCo
According to CellPointDigital, 85% of business transactions in Latin America are still conducted with cash, and just 39% of the region’s population has a bank account. The contrast between Latin America’s cash and banking habits compared to those in the U.S. is staggering. 94% of adults in the U.S. have a bank account, according to the Federal Reserve, and only 26% of the country’s transactions last year were made with cash. It’s unlikely that the disparity will remain this stark, however.
StoneCo is a Brazil-based payment-processing company that’s helping drive the growth of card and app-based payments in Latin America, and it looks poised for big growth as more people join banks and take up payment methods other than cash. The company also operates a financing division that provides loans for businesses.
The fintech specialist has been prioritizing growth in its domestic market and posting impressive results, even as the Brazilian economy has been moving through a rough patch. Payment volume on the company’s platform jumped 42% year over year in the first quarter, sales climbed 38.3% in the period, and net income rose 22.6%. Brazil’s sizable population of more than 210 million people and relatively low penetration for payment-processing services suggests plenty of room for long-term growth, and the company could also see big growth in other Latin American countries.
StoneCo is already consistently profitable, and shares look like a strong buy, trading at roughly 71 times this year’s expected earnings.
2. CrowdStrike Holdings
Work-from-home measures taken in response to the coronavirus pushed more business into the digital space and heightened the need for strong cybersecurity protections. Growth for digital commerce and communications was already rising at a rapid clip, but the need to stem the spread of the COVID-19 respiratory illness substantially elevated demand, and it’s a virtual certainty that online business growth will continue to power the overall economy long after the need for social distancing and other measures has abated.
CrowdStrike is a cloud-based cybersecurity company that helps prevent enterprise customers’ computers and mobile devices from being hacked. Sales increased 85% year over year to reach $178.1 million in the first quarter, and free cash flow for the period jumped to reach $87 million — up from a cash burn of $16.1 million in the first quarter of 2019. The company should continue to benefit from the trend of more business being conducted online and a rising tide of cybersecurity threats.
The endpoint security specialist has a subscription-heavy business model with high customer retention and strong gross margins. Gross margins on the company’s subscription revenues came in at 77% last quarter (up from 72% in Q1 2019), and there’s plenty of room for sales and earnings expansion as the business brings new enterprise customers on board and existing customers increase their spending.
CrowdStrike has a market capitalization of roughly $23 billion and is valued at roughly 30 times this year’s expected sales, but the company’s growth-dependent valuation could end up looking very cheap with the passage of time.
3. Zynga
As far as long-term tech trends go, increasing demand for interactive entertainment looks like one of the safest bets there is. Video games are still relatively young as a medium, and their participatory nature leads to higher levels of engagement and longer product life cycles compared to other media.
Zynga is a mobile games publisher that releases casual and social-focused titles, and the company looks ready to reap rewards from smart moves it’s made over the last half-decade and the overall growth of the interactive-entertainment industry. Zynga has been releasing content updates and honing monetization strategies to drive spending across its portfolio of core franchises, and it’s also been on a major acquisitions push to bring new properties and development studios into the fold.
The company recently made its largest-ever acquisition, purchasing Istanbul-based Peak Games in a $1.8 billion deal at the beginning of June. Zynga expects that integrating the developer’s titles will boost its mobile daily active user base by more than 60%. If the company can manage the same monetization magic with Peak’s video games that it has with other titles, the business should enjoy a major new growth catalyst. Zynga also still has a net cash position of roughly $500 million, so it has room to pursue additional acquisitions and investments to drive growth.
Zynga appears to have made a return to posting consistent profitability, and shares trade at roughly 30 times this year’s expected earnings. The company’s current library of games should provide dependable sales and earnings streams, and the stock could skyrocket if new franchises also prove to be hits.