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.

KEY DATA:  ISM (Manufacturing): +2.6 points; Orders: +4.7 points; Production: +5.7 points; Employment: +4.6 points/ Construction: -2.9%; Residential: -4.5%; Nonresidential: -1.8%

IN A NUTSHELL:  “The reopening is slowing the decline in activity.”

WHAT IT MEANS:  The economy is reopening and we are starting to see the economic numbers look less ugly.  Not, they are not good, but terrible can be an improvement from horrendous, so I will take it.  Consider the state of manufacturing.  The Institute for Supply Management’s May index rose.  On the surface, that looks good and in this case, up is always better than down.  But while just about every component increased, the levels still point to massive problems in the sector.  Consider new orders, which seemed to be a lot better.  Not really.  While the percent of respondents saying demand and production improved, the percent saying orders and output were down remained above fifty percent.  What is happening is that conditions are worsening at a slower pace.  That was also true with employment. The share saying payrolls were down fell to 41% from 46% in April, indicating that lots of firms are still downsizing. 

As for construction, it is actually holding in pretty well.  Yes, activity declined in April but less than expected.  Most of the drop was in residential.  Given the collapse of starts, the drop was much lower than forecast. States had started allowing construction to resume earlier than other activities, so I don’t expect construction to be the weakest link this quarter.

Commentary: Don’t take the data at face value.

We are entering a difficult time for the data mills, which includes the government, the Fed, industry groups and those private sector companies that produce numbers.  Government actions have created special circumstances that raise questions about the true meaning of the numbers.

The first and maybe biggest issue is that the seasonal adjustment factors may be largely meaningless.  Changes in activity are likely occurring more because of states allowing activities to occur rather than normal seasonal changes. Seasonal factors cannot adjust for that.  Thus, while all of the data creators are doing the best they can, the seasonally-adjusted data they produce are suspect. The employment numbers on Friday are likely to be really ugly, but they will suffer from an inability to decipher what was going on due to seasonal changes and what was happening as a result of government decisions or economic conditions.  

The second issue, which is something only we data wonks worry about, affects certain types of measures, such as diffusion indices.  For example, the ISM report referenced above is a typical diffusion index in that it asks if the measure under consideration (orders, production, employment etc.) was better (higher), the same or lower (worse).  The difference between better and worse is calculated, seasonally adjusted and turned into an index.  Consider the case of a firm that closed down its production line in April.  That month, it reported that output declined, which lowered the overall index.  But in May, if it was still shuttered, it reported that output remained the same i.e., zero.  With a diffusion index, going from down to unchanged actually increases the index level.  That would happen despite the fact that the firm still produced nothing.  In normal times, the ebb and flow of these changes even out.  In times like this, looking at the overall index level rather than the components can be very misleading.  Unfortunately, under the current circumstances, even the data nerds who dig into those details are having trouble understanding what is happening.

The final issue is the one I mentioned in my unemployment claims report.  To the extent that government policy was designed in a way that intentionally or unintentionally masks the true nature of the data, the numbers become suspect.  If the PPP causes firms to hire people that don’t actually produce anything, and that is likely given the spending requirements, the private sector employment numbers are corrupted.  A worker gets moved from unemployment, lowering that number, and is counted as employed, raising that number.  But that worker effectively remains on the government payroll (paid by a PPP grant) and still doesn’t produce anything.  The employment and unemployment numbers are artificially improved, but nothing changed.  We have no measure of those workers, so the best we can say over the next few months is that the payroll data overstate the true state of things while the unemployment rate understates what is happening.  Keep that in mind when you see the next few months of employment reports. 

KEY DATA:  Claims: 2.1 million; Insured: -3.86 million/ Durables: -17.2%; Vehicles: -52.8%; Capital Spending: -5.8%/ Pending Sales: -21.8%/ GDP: -5.0% (previously -4.8%)

IN A NUTSHELL:  “People are going back to work, but layoffs remain extraordinarily high.”

WHAT IT MEANS: The economy is opening and the PPP is kicking in, so what is happening to layoffs?  They remained above two million, a number that just two months ago would have been characterized as incomprehensible.  In this world of “what have you done for me lately”, this is likely to be viewed as “good” because it is the lowest in nine weeks.  But really, is there any reason to see something positive in this level of claims?  No.  It signals that firms and governments are still massively cutting workers.  The number of people receiving unemployment checks fell dramatically.  That, of course, was expected to happen.  As a consequence, the so-called insured rate, which is the percentage of the labor force receiving benefits, fell. 

Durable goods orders plummeted in April, but the decline was actually in line with estimates.  April was when everything shut down, so a double-digit drop was hardly a surprise.  The biggest decline was in the vehicle sector.  With sales cratering, and the assembly lines shuttered, that too was not a shock.  Conditions are changing in May, so look for things to start to turnaround in the next report.  One number, though, should be watched more closely.  The proxy for business investment spending – nondefense, nonaircraft capital goods orders – fell significantly.  It is not clear if, when or why this measure will turnaround. 

The National Association of Realtors reported that pending home sales, a measure of future existing home purchases, fell sharply in April.  That does not bode well for the spring sales numbers.  The largest drop was in the Northeast, where signed contracts fell by nearly fifty percent.  But the declines were fifteen percent or more in the other three regions, so you can say that the weakness was widespread. 

First quarter GDP was revised downward a touch, but the new number doesn’t change anything.  It really doesn’t matter if we are talking about a drop of 4.8% or 5%, activity fell sharply in the first quarter.  What is important is that the hole we are digging turned out to be a little bit deeper than initially thought. And with second quarter GDP likely to be down at least 20%, even with the economy reopening, it could take two years to get back to the fourth quarter 2019 GDP level.     

IMPLICATIONS: We are entering the confusion stage for the employment and unemployment numbers.  Reopening of the economy is taking people from government payrolls to private sector payrolls, which is good.  But the PPP is creating problems with understanding what exactly is happening.  As I noted in my many criticisms of the PPP, the requirements of hiring back a high percentage of form employees, whether they were needed or not, would hide the true state of unemployment.  Those workers who are rehired to meet the PPP requirements but who essentially do nothing, are still functionally unemployed.  But for statistical purposes, they are considered to be employed.  That artificially lowers the unemployment rate without raising production.  It also artificially raises the payroll numbers.  I am pretty sure that obfuscating the true state of the labor market was an intent of the law, as it only made it difficult for firms to operate efficiently.  Thus, the massive drop in the number of people on unemployment doesn’t necessarily translate into a strong rise in output.It does, however, hide the true labor market weakness.  What worries me is that once the PPP deadlines are met, if the firm still doesn’t need the workers, we could see a surge in layoffs.  That would be happening even though the number of people on unemployment would have been falling for weeks.  The point is that as we move through June and start approaching the PPP deadlines, the likely decline in insured unemployment could be overstating the pace of improvement.That is what happens when politicians develop programs aimed at altering economic data, not economic reality.Indeed, if many workers are forced to leave unemployment for lower-paying, non-productive private sector jobs, consumer spending and productivity could decline.  That would wind up hurting the recovery, not helping it.  I will try to provide the necessary caveats about the data, but since we have no measure of the number of workers hired because of the PPP but who are functionally unemployed, any interpretation will be suspect.

KEY DATA:  Confidence: +0.9 point, Phil. Fed (NonMan.): +41.1 points/ Home Sales: +0.6%/ CFNAI: -11.8 points 

IN A NUTSHELL:  “The free fall started to stabilize in May, but the economy is in a really deep hole.”

WHAT IT MEANS:  We expected April to be the cruelest economic data month and it was.  In contrast, the May and June data should start to tell us the extent to which conditions have stabilized or maybe even turned.  One critical measure is consumer confidence and in May, the Conference Board’s Index rose a touch, which was good to see.  However, the current conditions index continued its decline, though that drop was modest.  There was a slightly larger increase in expectations, which was expected given that the economy did start to reopen during the survey period.  While it was nice to see that the overall confidence index is no longer collapsing, it was disturbing to see that the percent of respondents saying that business conditions were bad rose fairly solidly and is now over fifty percent.

The May Philadelphia Fed’s NonManufacturing Index rose sharply.  But don’t look at that gain as being good.  The level of the index was coming off of record lows and remains in deep recession mode.  Also, this is a diffusion index, which does not measure levels, only relative changes.  In April, manufacturing crashed and burned.  In May, the conflagration continued. 

The good news today was that new home sales actually increased.  That was totally unexpected.  Even though many states allowed construction to continue, it was expected that sales contracts would drop. Demand was up in three of the four regions with only the West reporting a decline.  The other eye-opener in the report was the 8.6% drop in prices.  It is hard to really know whether this represents builders having “fire” sales (pardon the pun) or just a shift toward lower priced homes, but the decline was quite large. 

The Chicago Fed’s National Activity Index plunged in April.  This is a very broad measure as it includes eighty-five indicators and it signaled that the downturn was spread across the entire economy.  That should not surprise anyone, but it will take a lot just to get us back to expansion mode from deep recession mode.

IMPLICATIONS: It was good to see that consumer confidence has stabilized.  Given that every state is now starting to reopen, the outlook for the future should improve solidly in the months to come.  At least for the next few months, it is the measures of current conditions that may matter more.  If they start improving significantly, it would be a sign that households are ready to spend money.  Modest improvements, though, would be warnings that consumption may not surge and that would mean a more tepid recovery.  Meanwhile, investors are more focused on vaccine issues than the economic data.  Anytime hopes for a vaccine being found by year’s end rise, the markets soar.  But as I have noted, it could take up to two years to get back to where we were at the end of 2020.  That should factor into earnings potential, since one assumes that the level of activity has something to do with the level of potential earnings.  Yet the S&P is back to late October 2019 levels, when investors were factoring in decent growth this year.  (It is also back to early March, but that was when the markets were collapsing.)  So, does earnings growth or do earnings levels matter?  Ask investors. I’m just an economist who teaches corporate finance and theory and practice don’t seem to be in synch to me.  Also, part of today’s rally is likely due to Dr. Fauci saying last week:  “I think it is conceivable, if we don’t run into things that are, as they say, unanticipated setbacks, that we could have a vaccine that we could be beginning to deploy at the end of this calendar year, December 2020, or into January, 2021”.  Man, he sounds just like an economist, hedging his forecast in every way possible. Let’s hope he is close to being right.     

KEY DATA:  Starts: -30.2%; Year-to-Date: +7.6%; 1-Family: -29.4%; Multi-Family: -40.1%/ Permits: -20.8%; Year-to-Date: +3.7%; 1-Family: -24.3%; Multi-Family: -14.2%

IN A NUTSHELL:  “The housing market has taken a big hit, but don’t count it out just yet.”

WHAT IT MEANS:  As expected, home construction faltered in April.  Multi-family projects were cut back more than single-family, but both were down massively.  Regionally, the differences were fairly large, though every area posted a decline. Starts fell by “only” 14.9% in the Midwest, were off 26% in the South and cratered by over 40% in both the Midwest and Northeast.  But these data need to be put into perspective.  Construction was really strong going into the pandemic and the total number of units started during the first four months of this year was still up sharply over the same period in 2019.  That was in spite of two months of huge declines.  The only area where activity was down during the first four months was in the Northeast and that decline was modest.  Looking forward, permit requests were not off as much as starts and the gap between the two grew dramatically.  As I have noted in the past, builders don’t pay for permits just to have them sitting around.  Indeed, homes permitted but not yet started were down from the April 2019 level, so there is not a great backlog. From the peak set in January, April housing starts were down 45%.  That provides lots of room for improvement, especially since permit requests were off only about 30%.  So look for activity to rise going forward.

IMPLICATIONS:The housing market was leading the way until the pandemic shut things down.  Where it goes from here is not totally clear but it is likely that April was the cruelest month for this sector as it was for just about every other one in the economy.  Mortgage rates are down to historic lows and demand seems to be reviving.  But the problem is buyer uncertainty about making a purchase in this environment.  That consists of both the willingness to visit homes and the ability or readiness to commit to the largest purchase they make.  Listings are dropping like rocks and it is not clear that virtual tours do it for many or even most buyers.  That is less of an issue for new-home buyers, but still a concern. Starts were at such a low level in April that it is still likely that residential construction will be off by at least 25% this quarter and it could take a year or more to get back to the January peak pace.  Meanwhile, back in the markets, investors keep searching for the positive and are largely dismissing the negative as being a remnant of the past.  That is what has powered the massive upturn, not any hard evidence that a vaccine will be ready anytime soon or that opening up in the random way we are doing it will be safe.  Hope may run eternal, but it is reality that counts.  Here is a story I like to tell.  In the early 1980s, I attended a U.S. House of Representative hearing on oil shale production.  An industry representative was asked how long it would take to start producing oil.  Remember, the country was desperate for domestic supply given the oil embargoes of the seventies.  The answer was, if everything goes right, about twelve months (at least that is what I remember).  Nearly forty years later, we are still waiting.  Actually, we no longer care.  There is nothing wrong with hoping for the best, but it is always best to plan for the worst.  I am not sure investors are doing that.  They seem to be hoping for the best and planning for even better.

KEY DATA:  Payrolls: -20.5 million; Private: -19.5 million; Manufacturing: -1.3 million; Leisure and Hospitality: -7.7 million; Health Care: -2.1 million; Retail: -2.1 million/ Unemployment Rate: 14.7%; Labor Force: -6.4 million; Unemployed: +15.9 million

IN A NUTSHELL:  “The employment declines were historic and the unemployment rate hit a post WWII record, so it is hard to find anything good in this report.”

WHAT IT MEANS:  Welcome to the world of pandemic economic numbers and they aren’t very pretty.  The April employment report was expected to set records and it did.  Let’s start with the jobs situation.  The 20.5 million payroll decline was the largest for any single month or year.  The declines were so broad based that fewer than five percent of the 258 private industries posted a payroll gain.  Even at the worst point in the Great Recession, over fifteen percent of the industries posted gains.  The loss leaders were, as expected, leisure and hospitality, retail and manufacturing. Health care took a huge hit and that included hospitals.  Emergency/Covid-19 care requirements could not overcome the loss of demand for every other type of health care service as people stopped going to doctors and dentists, except in emergencies.  The only private sector industry that posted a rise of any significance was retail warehouses, such as Costco and BJs.  Otherwise, it was basically all red.  There was also a data calculation issue. BLS noted that, “Business births and deaths cannot be adequately captured by the establishment survey as they occur”.  I suspect that in this shuttered economy, the death rate is a lot higher than normal while the birth rate is significantly lower. That implies a larger decline in total payrolls than estimated.  But the estimation process could not capture that change in behavior, so consider the job loss a lower bound.  The real job loss number was likely a lot higher, though it is impossible to know by how much.

As for the unemployment rate, it did not rise to as high a level as projected.  But that was due to the some special circumstances.  First, the labor force collapsed.  Over the past two months, 8.1 million people have left the labor market and most of those workers are likely unemployed.  They just didn’t see any reason to look for jobs since there weren’t any, so they were not counted as unemployed.  That alone could have added almost five percentage points to the rate.  There were other data collection/identification/classification issues as well, including rules that determine how to determine whether a person who is not working is employed or unemployed.  In a special comment in the report, BLS noted the data collection and identification issues and pointed out that “If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis)”.  Simply put, the 14.7% rate is a lower bound and the “real” number is probably close to 20%.  Indeed, the so-called “real unemployment rate” was 22.8%.  This includes people who gave up looking for jobs, which is a real issue now. 

There were a couple of other interesting (odd?) numbers in the report.  The average hourly wage soared by 4.7%, compared to a couple of tenths that is normal.  Also the workweek rose.  It looks like low-income workers bore the brunt of the job losses and people who could continue working either picked up hours or if they worked from home, kept their hours.  Finally, the labor force participation rate fell to its lowest level since January 1973.  That was the start of the Baby-Boomers surge into the labor force.

IMPLICATIONS:As bad as the data were in April, the problems with classification and collection, as well as the continued surge in jobless claims, indicate that the job loss and unemployment numbers were lower bounds, not accurate measures of what really is going on.It is likely that the May unemployment rate will approach if not exceed 20%, that it probably was already in April. I would not be surprised if investors are celebrating the lower than expected unemployment rate, but if they are doing so, they are misreading the data.  But there is a threat to the markets from the underestimation of the unemployment rate due to the declining labor force.  Once the economy starts reopening and job losses fade, the workers who left the labor market will start returning.  That would slow the decline in the unemployment rate.  If investors are expecting a rapid drop in the rate, they are likely to be greatly disappointed.  And once the data collectors start getting more information on births and deaths, we will probably see job gains grow more slowly, as bankruptcies are likely surging.  The point is that the labor market is in even worse shape than these terrible numbers indicate, which as I have noted before, means it will take longer to dig ourselves out of this hole. 

KEY DATA:  Claims: 3.84 million; 6-Week Total: 30.1 million/ Consumption: -7.5%; Income: -2%; Inflation: -0.3%; Ex-Food and Energy: -0.1%/ ECI: +0.8%; Wages: +0.9%

IN A NUTSHELL:  “The unemployment rate could approach the record high set during the Great Depression.”

WHAT IT MEANS:  Unemployment claims eased again last week, but if you think that is good news, forgetaboutit.  The decline is slow and the total is likely to reach 35 million.  While some parts of the economy are opening slowly, other segments, especially state and local governments, are starting to downsize.  Some firms that have held on, now realize the economy will not open all at once and they are starting to furlough workers.  And, of course, with states using Cro Magnum Era unemployment computer systems, the backlogs remain high.  So, while yes, the pace of new claims is coming down, it is still so extraordinarily high that the total continues to rise at an alarming pace.  Understandably, we are looking for good news, but so far, the unemployment data are best described as not as horrible. 

After solid consumer spending in January and February, when the economy started shutting down in mid-March, so did spending.  Demand for durable goods, especially vehicles, collapsed.  The real problem, though, was that purchases of services, which make up about two-things of all consumer outlays, were off by nearly double-digits.  As for income, that did not drop as much.  That may have been due to firms giving workers one or two weeks of pay when they furloughed or cut them.  A huge reduction in income is likely to be seen in the April data. 

Employment costs, especially wages, were up solidly in the first quarter. The Employment Cost Index adjusts for changes occupation and industry distributions, making it the best measure of wage and benefit costs.  But the response date was March 12, so we are talking pre-shut down data. 

IMPLICATIONS:  How high will the unemployment rate go?  As a reference, we can use the insured unemployment rate, which is the percentage of the labor force on unemployment insurance.  As of the week ending April 18^th, it was 12.4%.  But the insured rate and the measured rate often differ dramatically.  It takes time for people to apply, some don’t apply, as they don’t think they are eligible and backlogs can skew the data.  The current insured level is also different from the past as business owners and gig workers are now eligible when in the past many or most were not.  At the same time, as the CARES Act kicks in, workers who would have been on the unemployment rolls are now being counted as employed, though they may be functionally unemployed.  On net, the measured rate will be a multiple of the unemployment rate.  In the past, that has ranged from a low of 1.3 times (at the end of the oil embargo recession), to 3.4 times (during the past few years when the unemployment was historically low).  My guess is that it will be something around 1.5 times, which would put the April rate at about 18.5%.  Since another five million more people could become unemployed, the rate is likely to peak near 22%.  The peak during the Great Depression was about 25%, so it is not completely out of reach.  It is also a record we don’t want to break. 

The importance of the peak unemployment rate is that it is the point from which we start our recovery.  Given that the virus, not economic factors, will determine the speed at which the economy can reopen, the higher the peak, the longer the trek down the mountain.  That is especially critical since we are not simply flipping a switch and starting back up.  An unemployment rate above 20% implies that income and demand will remain depressed for an extended period of time.  We could still be around 10% at the end of the year.  That was the high rate in the Great Recession and the return to a strong economy took years.  There has been a lot of damage done to the economy and a lot more needs to be done before conditions even approach normal.  That is the message in today’s unemployment claims report.