KEY DATA: Claims: 2.1 million; Insured: -3.86 million/ Durables: -17.2%; Vehicles: -52.8%; Capital Spending: -5.8%/ Pending Sales: -21.8%/ GDP: -5.0% (previously -4.8%)
IN A NUTSHELL: “People are going back to work, but layoffs remain extraordinarily high.”
WHAT IT MEANS: The economy is opening and the PPP is kicking in, so what is happening to layoffs? They remained above two million, a number that just two months ago would have been characterized as incomprehensible. In this world of “what have you done for me lately”, this is likely to be viewed as “good” because it is the lowest in nine weeks. But really, is there any reason to see something positive in this level of claims? No. It signals that firms and governments are still massively cutting workers. The number of people receiving unemployment checks fell dramatically. That, of course, was expected to happen. As a consequence, the so-called insured rate, which is the percentage of the labor force receiving benefits, fell.
Durable goods orders plummeted in April, but the decline was actually in line with estimates. April was when everything shut down, so a double-digit drop was hardly a surprise. The biggest decline was in the vehicle sector. With sales cratering, and the assembly lines shuttered, that too was not a shock. Conditions are changing in May, so look for things to start to turnaround in the next report. One number, though, should be watched more closely. The proxy for business investment spending – nondefense, nonaircraft capital goods orders – fell significantly. It is not clear if, when or why this measure will turnaround.
The National Association of Realtors reported that pending home sales, a measure of future existing home purchases, fell sharply in April. That does not bode well for the spring sales numbers. The largest drop was in the Northeast, where signed contracts fell by nearly fifty percent. But the declines were fifteen percent or more in the other three regions, so you can say that the weakness was widespread.
First quarter GDP was revised downward a touch, but the new number doesn’t change anything. It really doesn’t matter if we are talking about a drop of 4.8% or 5%, activity fell sharply in the first quarter. What is important is that the hole we are digging turned out to be a little bit deeper than initially thought. And with second quarter GDP likely to be down at least 20%, even with the economy reopening, it could take two years to get back to the fourth quarter 2019 GDP level.
IMPLICATIONS: We are entering the confusion stage for the employment and unemployment numbers. Reopening of the economy is taking people from government payrolls to private sector payrolls, which is good. But the PPP is creating problems with understanding what exactly is happening. As I noted in my many criticisms of the PPP, the requirements of hiring back a high percentage of form employees, whether they were needed or not, would hide the true state of unemployment. Those workers who are rehired to meet the PPP requirements but who essentially do nothing, are still functionally unemployed. But for statistical purposes, they are considered to be employed. That artificially lowers the unemployment rate without raising production. It also artificially raises the payroll numbers. I am pretty sure that obfuscating the true state of the labor market was an intent of the law, as it only made it difficult for firms to operate efficiently. Thus, the massive drop in the number of people on unemployment doesn’t necessarily translate into a strong rise in output.It does, however, hide the true labor market weakness. What worries me is that once the PPP deadlines are met, if the firm still doesn’t need the workers, we could see a surge in layoffs. That would be happening even though the number of people on unemployment would have been falling for weeks. The point is that as we move through June and start approaching the PPP deadlines, the likely decline in insured unemployment could be overstating the pace of improvement.That is what happens when politicians develop programs aimed at altering economic data, not economic reality.Indeed, if many workers are forced to leave unemployment for lower-paying, non-productive private sector jobs, consumer spending and productivity could decline. That would wind up hurting the recovery, not helping it. I will try to provide the necessary caveats about the data, but since we have no measure of the number of workers hired because of the PPP but who are functionally unemployed, any interpretation will be suspect.