KEY DATA: Claims: 3.84 million; 6-Week Total: 30.1 million/ Consumption: -7.5%; Income: -2%; Inflation: -0.3%; Ex-Food and Energy: -0.1%/ ECI: +0.8%; Wages: +0.9%
IN A NUTSHELL: “The unemployment rate could approach the record high set during the Great Depression.”
WHAT IT MEANS: Unemployment claims eased again last week, but if you think that is good news, forgetaboutit. The decline is slow and the total is likely to reach 35 million. While some parts of the economy are opening slowly, other segments, especially state and local governments, are starting to downsize. Some firms that have held on, now realize the economy will not open all at once and they are starting to furlough workers. And, of course, with states using Cro Magnum Era unemployment computer systems, the backlogs remain high. So, while yes, the pace of new claims is coming down, it is still so extraordinarily high that the total continues to rise at an alarming pace. Understandably, we are looking for good news, but so far, the unemployment data are best described as not as horrible.
After solid consumer spending in January and February, when the economy started shutting down in mid-March, so did spending. Demand for durable goods, especially vehicles, collapsed. The real problem, though, was that purchases of services, which make up about two-things of all consumer outlays, were off by nearly double-digits. As for income, that did not drop as much. That may have been due to firms giving workers one or two weeks of pay when they furloughed or cut them. A huge reduction in income is likely to be seen in the April data.
Employment costs, especially wages, were up solidly in the first quarter. The Employment Cost Index adjusts for changes occupation and industry distributions, making it the best measure of wage and benefit costs. But the response date was March 12, so we are talking pre-shut down data.
IMPLICATIONS: How high will the unemployment rate go? As a reference, we can use the insured unemployment rate, which is the percentage of the labor force on unemployment insurance. As of the week ending April 18th, it was 12.4%. But the insured rate and the measured rate often differ dramatically. It takes time for people to apply, some don’t apply, as they don’t think they are eligible and backlogs can skew the data. The current insured level is also different from the past as business owners and gig workers are now eligible when in the past many or most were not. At the same time, as the CARES Act kicks in, workers who would have been on the unemployment rolls are now being counted as employed, though they may be functionally unemployed. On net, the measured rate will be a multiple of the unemployment rate. In the past, that has ranged from a low of 1.3 times (at the end of the oil embargo recession), to 3.4 times (during the past few years when the unemployment was historically low). My guess is that it will be something around 1.5 times, which would put the April rate at about 18.5%. Since another five million more people could become unemployed, the rate is likely to peak near 22%. The peak during the Great Depression was about 25%, so it is not completely out of reach. It is also a record we don’t want to break.
The importance of the peak unemployment rate is that it is the point from which we start our recovery. Given that the virus, not economic factors, will determine the speed at which the economy can reopen, the higher the peak, the longer the trek down the mountain. That is especially critical since we are not simply flipping a switch and starting back up. An unemployment rate above 20% implies that income and demand will remain depressed for an extended period of time. We could still be around 10% at the end of the year. That was the high rate in the Great Recession and the return to a strong economy took years. There has been a lot of damage done to the economy and a lot more needs to be done before conditions even approach normal. That is the message in today’s unemployment claims report.