KEY DATA: Claims: 2.98 million (down 195,000); Continuing Claims: 22.83 million (up 456,000)/ Import Prices: -2.6%; Fuel: -31.5%/ Exports: -3.3%; Farm: -3.1%
IN A NUTSHELL: “New unemployment claims remain at extraordinarily high levels and the modest decline points to an extended deterioration in the labor markets.”
WHAT IT MEANS: New claims for unemployment insurance eased a touch last week, but the deceleration in the rate of filings was disappointing. The level remains in the three million range and has been there or above for eight weeks now. Over that time period, 36.6 million people have filed for unemployment compensation. Not every person who files receives compensation and right now only about sixty percent who have filed have made it onto the rolls. It looks like there is a major backlog that states still have to get through. That is bad news but also good news. Too many households don’t have money to spend, but once they start receiving the checks, consumption should pick up. Maybe more importantly, as the backlogs disappear, the continuing claims number could take center stage. With the economy reopening, that number will provide a weekly indication of how well the back-to-work process is reducing the number unemployed.
Prices for lots of things keep coming down, at least that is what the government data claim. Import prices dropped sharply in April, but as we saw with consumer and wholesale costs, most of that was in energy, where prices simply cratered. Imported consumer goods costs were off modestly as food prices dropped. But vehicle and capital goods prices were up. On the export side, the farm sector continues to be battered as the prices of the goods they sell fell again.
IMPLICATIONS: About the only good thing about recessions is that prices generally don’t go up and often they fall. But that is usually a short-term phenomenon that is followed by a steady recovery back to more normal inflation. The problem facing the Fed is that its “normal” of 2% had been hard to reach since the Great Recession. So running into a massive economic collapse cannot help in its drive to revive inflation. Right now, low inflation is not the Fed’s number one concern. However, while it was pretty much back to 2% earlier this year, the progress has been lost. Since deflation is the major fear for developed nations, the focus of attention will shift quickly once the economy is well on its way to opening up completely. Just as the peak in the unemployment rate will determine how difficult it will be to get the labor markets back to a reasonable position, the inflation rate nadir will determine the difficulty in getting inflation back to a desirable rate. Simply put, the lower the rate, the longer the Fed will have to keep rates at rock bottom. That is something investors should keep in mind.