KEY DATA: Claims: 1.54 million (-355,000); Continuing Claims: 20.93 million (-339,000)/ PPI: +0.4%; Foods: +6.0%; Energy: +4.5%
IN A NUTSHELL: “Layoffs are slowing, but the level of people still applying for unemployment payments remains incredibly high.”
WHAT IT MEANS: Given the surprising May jobs report and the widespread reopening of the economy, the unemployment claims and continuing claims numbers have taken on new importance. New unemployment claims declined for the tenth consecutive week, which is the good news. However, the number of people being laid off remains extraordinarily high. There is really nothing good about having one and a half million more people becoming unemployed. The number of workers who are receiving unemployment checks also fell, but the level remained above twenty million, a sign that the labor market is coming back but is still hurting. The Bureau of Labor Statistics admitted that there was a misclassification in the data and the unemployment rate should have been a lot higher ion both April and May. Once the reopenings are largely complete, or as complete as they will get, the claims numbers have to drop below 350,000 before we can have confidence that the decline in the unemployment rate will continue unabated. Since that is not likely to happen for quite some time, the unemployment rate could remain in double digits for much of the remainder of the year.
Wholesale prices jumped in May, which was a surprise. What was not that great a surprise was the jumps in food and energy. Meat shortages led to the wholesale price of beef and veal to surge by 69% and as every shopper knows, those costs have been passed through to the consumer. Crude oil prices (West Texas Intermediate) jumped by almost 73% in May, so the wholesale surge in energy costs also made sense. Excluding those two sectors, though, the prices of wholesale goods were flat. On the services side, there really was minimal inflation pressure except from airlines starting to increase their prices from the rock bottom levels they had been.
IMPLICATIONS: In May, for the first time since the unemployment numbers were created in 1967, the number of people receiving unemployment checks (continuing claims) exceeded the number of people unemployed. That, of course, makes no sense since you have to be unemployment to remain on the unemployment rolls. That is the clearest indication that BLS, which produces both of those numbers, got the May unemployment report wrong. They admitted that the misclassification of data started in March and the unemployment rate was understated by one roughly percentage point in March, five in April and three in May. Assuming that BLS will finally correct the classification process in June, you have to use an unemployment rate of approximately 16.4%, not 13.3%, when comparing the May to June numbers. That would be the apples to apples comparison. Given the size of the labor force, three percentage points means about 4.75 million workers have to come off the rolls before we can cut into the reported 13.3% rate. That could happen in June, but it also means that the decline in the rate might be minimal.
But the real news came from Fed Chair Powell. His press conference yesterday was a classic two-handed economist approach. On the one hand, he made it clear the Fed would be providing massive amounts of liquidity to the system for an extended period. The Fed’s Summary of Economic Projections (SEP) table showed the funds rate at the current level through 2022. But then he produced the other hand. He noted that millions of workers might never return to their old jobs, implying that getting back to February’s 3.5% unemployment rate was not likely to happen for who knows how long. It is likely that the unemployment rate will not get below double-digits until the last quarter of the year. The GDP growth forecast, which showed solid gains the rest of this year and next, still implied that we would not get back to the 2019 fourth quarter level until spring 2022, two years from now. And all that is occurring without any assumption of a second wave of the virus, which the FOMC did not discount in its statement. Basically, Mr. Powell let everyone know that the Fed will do all it can, but the best it can do is limit the damage. That is a sobering message for investors, who were assuming that everything is beautiful and the virus was a nonevent. We will see if politics takes over the future course of fiscal policy, as it seems to be doing. My concern has always been what will happen when the economy has to stand on its own. Stretching out that time frame will be up to our political leaders, which means putting politics aside. Good luck with that.