KEY DATA: Claims: 6.6 million; Insured (Level): 7.46 million/ Sentiment: -18.1 points; Current Conditions: -31.3 points
IN A NUTSHELL: “With 16.8 million new unemployment claims in just the past three weeks, the unemployment rate could easily reach 20%.”
WHAT IT MEANS: The drumbeat of shockingly bad labor market numbers continues. Another 6.6 million people filed for unemployment insurance last week, bringing the total for just the past three weeks to 16.8 million workers. Keep in mind, not everyone is eligible for unemployment insurance. However, with CARES Act allowing small business owners to file (they made unemployment insurance payments but weren’t eligible themselves), the number is a better measure of the loss of jobs than previous numbers. Regardless, what we are seeing is an emptying out of the employment rolls that represents the impacts of the shut downs. And with some states just starting to close business, these numbers should remain high for a few more weeks. However, I do expect them to start trending downward. The number of insured is lagging the claims numbers and that is already at a record high. So, expect us to take out the Great Recession unemployment high of 10% and even the post-WWII high of 10.8% posted in December 1982, possibly as soon as the April report.
The consumer confidence numbers are starting to catch up with reality. The University of Michigan’s early reading of April Consumer Sentiment fell sharply. But it was the Current Conditions Index that crashed and burned. I had noted in the last commentary about this indicator that households seemed to be delusional. No longer. And there was a clear warning in this report: “Consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick, robust, and sustained economic recovery.”
Labor and Equity Market Implications: When all is said and done, the unemployment rate could exceed 20%. That depends upon how many workers are transferred from the unemployment insurance rolls to the CARES Act, government paid, private sector payrolls. Those being paid by the government but carried by private firms are technically not unemployed, so as I have noted before, the unemployment rate will be an artificial measure. Nice trick. But the CARES Act also creates a conundrum for low to moderate-income workers. For as long as the extra $600 per week addition to unemployment compensation persists, total payments to lower paid workers will likely replace all of what they lost (and maybe even more). Thus, the incentive for many unemployed is to not accept a job offer to return to work. That sets up a potential battle between employers and former employees. For the CARES Act loans to become grants, firms need to rehire/replace a significant proportion of their former payrolls. This will incent firms to pressure workers to take job offers, even if those jobs are not in the best interest of the workers. Welcome to the world of unintended consequences. And even if the unemployment rate winds up maxing out “only” in the low to mid-teens, it would still be well above the Great Recession high of 10%.
After the back-to-back recessions in the early 1980s, it took over four years to get within one percentage point of the previous expansion’s low unemployment rate. It took five and a half years after the peak in the unemployment rate was reached during the Great Recession to get back to within a one percentage point of the previous low. Since the CARES Act unemployment rate will already include a large number of rehired workers, we might not see a surge in hirings once the economy is reopened. Thus, it could take five years to get within one percentage point of the February 2020 rate. That has some significant implications for the equity markets. Currently, investors seem to think that the massive government and Federal Reserve loan and grant programs will get the economy bouncing back quickly. It seems like a V-shaped recovery is getting baked into the cake. But those programs will start to wear off. The government doesn’t have an infinite amount of money to keep paying workers that are on private payrolls. Those firms will eventually have to become profitable enough to pay their workers by themselves. Yes, public welfare is great when you are receiving the funds for free and business owners are gratified for the largesse. But that approach is only a crisis-created way of life. Eventually, capitalism must be reign and with the unemployment rate so high, spending power will be limited. Eventually, earnings growth for the second half of this year and for 2021 has to be factored into equity prices. The claims data point to double-digit unemployment rates and if we do hit 20%, don’t expect earnings to be great for many companies for quite some time. Worse, if the rate remains near 10% for an extended period, the level of demand will not be enough to support many of the smaller businesses that were already living hand to mouth before the pandemic. So expect layoffs to resume during the second half of the year as the government funds get withdrawn. The alternative is longer and more expensive government subsidies and a massive budget deficit that will lead, ultimately, to crushing spending and tax changes. If anyone thinks that we can spend our way out of this at the level we are spending, without longer-term consequences, they are deluding themselves.