Weekly Jobless Claims and 1st Quarter Productivity

KEY DATA:  Claims: 3.2 million/ Productivity: -2.5%; Output: -6.2%; Labor Costs: +4.8%

IN A NUTSHELL:  “The stubbornly high number of new unemployment claims points to an unemployment rate that is nowhere near peaking.”

WHAT IT MEANS:  We knew it was bad out there but it is looking like it is even worse that we thought. For the week ending May 2nd, new claims for unemployment insurance came in above 3 million once again.  It had been expected that the number of layoffs would start tailing off fairly rapidly, but that doesn’t seem to be the case.  Yes they are going down, but this was the seventh consecutive week that the level exceeded the three million mark.  Over that period of time, 33.5 million workers have filed for assistance.  Using the March labor force level, that translates into 20.6% of the workforce.  Given the sluggish nature of the decline in claims and growing number of layoffs in government, health care and larger companies who have tried to hold on, the unemployment rate could be headed toward 25%.  That is not likely to be the number in the April report, but we could get there in the May or June. 

If you shut down operations but don’t cut workers as quickly, it tends to have a really negative impact on productivity and that was indeed the case in the first quarter.  Output was off significantly, despite the shutdowns not starting in earnest until the middle of March.  But layoffs lagged initially, so output per worker dropped sharply.  Meanwhile, compensation continued to rise.  The combination of lower productivity and higher wages is not something businesses like to see as it leads to surging labor costs, which is precisely what happened. 

IMPLICATIONS:We are close to halfway through the second quarter and while there has been some reopening of businesses, layoffs are continuing at an extraordinary pace.I thought unemployment claims might peak at 35 million, but that outcome looks to have the same probability as my winning the lottery.  Now I am wondering if we will hit 40 million, which would take us to an unemployment rate of 25% or more.  That is truly scary, as you have to go back to the early 1930s, during the Great Depression, to see anything nearly like that.  I don’t see getting up there, but I cannot rule it out.  The level of unemployment is important for many reasons, one of them being it can affect the speed at which businesses will rehire their workers once they get the green light.  Expected demand will be the driving force and you can assume managers to hire cautiously, at least initially.  The last thing they want to do is pay unnecessary labor costs, which would happen if they have too many workers.  They can always bring workers more on but firing people after a short time could have devastating impacts.  Consequently, the logical strategy is to rehire slowly.  That means there will be enormous numbers of people remaining on unemployment and that implies demand will grow slowly.But the slower the growth rate, the longer it takes to whittle down the unemployment rate and a high unemployment rate keeps managers from hiring robustly.  That sounds like a vicious cycle to me that could take an extended period to break.  It might not be the best strategy to buy into the idea that the peak unemployment rate doesn’t matter because once firms reopen, they will hire everyone back.  That is not likely to be the case.  So the higher the peak rate, the longer it will take to get back to even moderate rates of unemployment and the slower the recovery.