KEY DATA: Claims: 1.51 million (down 58,000); Continuing Claims: 20.54 million (down 62,000)/ Phila. Fed: +70.6 points; Orders: +42.4 points; Employment: +11 points/ LEI: +2.8%
IN A NUTSHELL: “Progress is being made on the unemployment front, but it is disappointingly slow.”
WHAT IT MEANS: Even though the economy continues to reopen, the focus of attention remains on the labor market and right now, the improvement is less than hoped for. New claims for unemployment insurance fell only modestly. Yes, a 58,000-drop is a lot of people on an absolute basis, but given the huge number of people continuing to file – over 1.5 million – it is not that great. With the entire country loosening restrictions, it was expected that the pace of workers being let go would decline and that would lead to a sharp drop in the number of people receiving unemployment checks. While the continuing claims number did fall, the pace of decline was also disappointing.
The Philadelphia Fed’s manufacturing index skyrocketed in early June. It was expected to improve, but not nearly as massively as we saw. However, this is a dispersion index and as I have mentioned before, you have to read these results carefully. There are three categories in the survey, increase, no change and decrease. When you go from decrease to either no change or increase, the index rises. When you go from no change to increase, the index rises. Thus, firms that had largely shut down in April, started to reopen in May and the process accelerated in early June. So they tended to move “up” from decrease or no change. Most firms are now either no longer cutting production or have stabilized (no change) or started back up. But the report says nothing about the pace of activity. So, you can have a huge change in the index without a similar huge change in production. A sign that is the case is the employment index. It was still negative, but layoffs are occurring at a slower pace. Thus, don’t look at this report as saying manufacturing in the Mid-Atlantic region is surging.
The Conference Board reported that its Leading Economic Index jumped in May. Again, this is a measure that has to be analyzed in detail and the details don’t say the economy is going to soar. As the report noted, “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index”. But we know, the level of claims remains at incomprehensibly high levels, so I am not impressed with the increase. Indeed, I agree with the conclusion of the report: “The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.”
IMPLICATIONS: Unfortunately, the best way to describe the today’s labor market numbers is disappointing. It is clear that a large number of firms and governments are continuing to cut their workforces. Over the past four weeks, roughly seven million workers filed for unemployment compensation. That is huge and it is important because as firms reopen, they are hiring back workers, which should lower the unemployment rate. But before that can happen, hiring companies first have to overcome the loss of jobs from businesses cutting back and that level is extraordinarily high. We can see that problem in the continuing claims data. The number of people receiving unemployment checks hardly declined, indicating that at least so far, hiring firms are barely overcoming the firing firms. Thus, the may not see a major decline in the June unemployment rate. Indeed, if BLS finally corrects its misclassification problem, we could actually see the rate rise from the May published rate. That is because the “real” or “comparison” rate is not 13.3% but something around 16.3%. Conditions are improving, but we need to stop looking at the percentage changes and start focusing on levels. When you start at a very low level, the percentage change is going to be large. That is just simple math. But if the level remains low compared to pre-virus levels, that indicates the size of the hole that we still have to climb out of. Right now, with 20.5 million people still receiving unemployment checks and undoubtedly many millions more unemployed, the hole remains extremely deep. Almost certainly, fiscal policy will have to step up once again when the current unemployment subsidies disappear as scheduled to happen at the end of July. Otherwise household incomes will fall sharply and much of the current rebound will fade.