KEY DATA: Claims: 5.245 million; 4-Week Total: 22.03 million/ Starts: -22.3%; Over-Year: +1.4%; Permits: -6.8%; Over-Year: +5%/ Phila. Fed (Manufacturing): down 43.9 points; Orders: down 55.4 points; Future Activity: up 7.8 points
IN A NUTSHELL: “Another week of massive unemployment claims and the end is not in sight.”
WHAT IT MEANS: When you shut down the economy, people become unemployed – duh – and the numbers we are seeing are unimaginable. Over 5 million people filed for unemployment insurance last week, bringing the total to over 22 million in just the last four weeks alone. Let me put this into perspective. During the Great Recession’s peak filing period, which occurred in March 2009, “only” 2.64 million people filed during a four-week period. That is, over eight times as many people filed for unemployment this year compared to eleven years ago. While the claims numbers should decelerate, they could remain incredibly high for the next few weeks, as some states have just started to put in social distancing curbs. It is likely the total will reach 30 million by mid-May. It is hard to see the unemployment rate peaking below 20%. That would be double the top reached during the Great Recession and it could probably even double the post-WWII 10.8% rate hit in November and December 1982.
Housing starts plummeted in March, but even that sharp decline may be misleading. Construction had been on a roll for a year and it looked like this sector would lead the economy this year. Thus, the large drop in construction may look bad, but starts were still higher than they were in March 2019. I suspect that if we had the numbers for the last week of the month, they would show a much greater decline and that is the level we need to be factoring into the outlook for the economy. It is unclear how far residential new construction activity will fall. Only a few states are limiting activity and that is often just for spec construction. The problem may be more in the multi-family area as social distancing requirements are harder to satisfy in large projects.
The Philadelphia Fed’s April index of manufacturing tanked, which was hardly a surprise. There were some interesting numbers in the report. Not one firm reported a rise in new orders while 71% said they declined. But while order books thinned, the decline was not excessively large and over 16% saw their backlogs increase. Despite the current carnage, respondents were more optimistic about the future. The index of activity six months from now rose. The easiest interpretation is that respondents believe we have hit rock bottom and there is no way to go but up. Let’s hope they are right.
IMPLICATIONS: It seems investors think there is no amount of short-term damage to the economy that matters. In the three weeks from March 21st, when the first massive job claims number was released and we saw that claims, not those unemployed, just those who could maneuver through the websites and file unemployment claims, reached a total of 22 million, the equity markets rose by double-digits and a record weekly gain were recorded. Really, did anyone factor that many unemployed people into equity prices? I doubt it. And that total will only rise a lot more. Previously, the largest number of people unemployed was 15.4 million in October 2009. We are likely to see more than twice that number this time. And even if the CARES Act artificially lowers the unemployment rate by shifting unemployment compensation payments from direct government checks to indirect government checks, the actual unemployment situation will not change. Those private sector-government paid workers eventually have to actually work and businesses will have to make enough money to pay them. Over thirty million is a large number to find real work when the reopening is going to be phased in. But hey, the relationship of Wall Street to Main has been tenuous for a long time so I guess we can chalk this up to … well I have no idea what.