KEY DATA:  Claims: 1.88 million (down 249,000); Benefit Recipients: +649,000/ Deficit: $49.4 billion (Up $7.1 bil.); Exports: -20.5%; Imports: -13.7%/ Layoffs: 671,129

IN A NUTSHELL:  “The reopening of the economy is reducing the unemployment rolls in fits and starts as layoffs remain extraordinarily high.”

WHAT IT MEANS:  Tomorrow may be the big day when it comes to the jobs numbers, but today’s claims report provides some texture to the data.  Initial claims for unemployment insurance moderated once again, but anything over half-million is extremely high and over a million is unthinkable.  To put the nearly 1.9 million numbers in perspective, during the same week last year, claims were 220,000.  Last weeks numbers were simply ugly and imply that firms and governments continue to cut their workforces at a rapid pace.  In May, over nine million people filed for unemployment.  But the economy is reopening and the impact of people being called back to work should be seen in the continuing claims, or total recipients numbers.  They had been coming down, but rose in the latest report.  It should be kept in mind that the recipient numbers are a week lagged, so look for the total to drop sharply next week. 

The trade deficit surged in April as exports collapsed more than imports tanked.  The economy shut down in April and that included trade.  The level of exports was the lowest since November 2009.  On the import side, the level was the lowest since November 2010.  The only import category that posted a rise was industrial supplies and that was due to a massive influx of nonmonetary gold.  I guess everyone took the cash from the stocks they sold and bought jewelry from domestic fabricators (really, I have no idea).  Imports of vehicles were down 52%.  Of course, vehicle exports were off 66%.  That sector collapsed and we see it in the trade numbers. Trade with China has also collapsed, but that means the trade deficit is narrowing dramatically.  So far this year, it is off 28.5%.  The real or price-adjusted goods deficit began the second quarter over eight percent wider and with the economy reopening, it looks like trade will be a major drag on growth going forward. 

Challenger, Gray and Christmas reported that May layoff announcements hit the second highest level since the report began in January 1993.  The highest was, not surprisingly, in April.  The key point is that firms are still cutting workers like crazy and while the May unemployment rate could be the peak, the decline could be slower than many expect. That just may be the case through the summer as the slow reopening will likely lead to firms deciding to either downsize or upsize more slowly until the true growth potential of the economy becomes clearer. 

IMPLICATIONS:Progress is being made on the labor front as the economy reopens. Though the pace has been disappointing, we should see things accelerate as we move through June.  That should limit the damage in the second quarter GDP report.  In the latest Blue Chip Financial report (of which I am a panel member), second quarter growth estimates range form -17.6% to -49.2%.  The consensus is -34%, while I am at -22%.  All of those are historic numbers, but the wide range shows how reopening is creating confusion in the forecasting ranks.  But the real issue is not so much the decline in the second quarter, but the recovery in the third and fourth quarters.  That will depend upon the pace in cutting the unemployment rate.  The Blue Chip Economic report will be released in a few days (we are just now filling that out now), and it will be interesting to see where the panel comes out on the fourth quarter unemployment rate.  I have it still around 10% and if that is the case, it will be tough to post two consecutive quarters of really strong growth even given the low level of activity from which we start.  Tomorrow, the May employment report should provide the depth of the hole we are in.  It is likely to be quite deep.