Jobless Claims - Bankruptcies Increase

Very Weak Jobless Claims

The economy is in a race against time. Good news is the number of COVID-19 cases is falling rapidly and the labor market is improving. Bad news is federal unemployment benefits have gone away in most states. 11 states have started paying people $300 per week and 3 states are paying people $400 per week. 

Small businesses and unemployed people are in trouble. A stimulus needs to come soon or the economy risks falling back into a slowdown. A decline in cyclical stocks shows the market notices this.

Race against the clock took a turn for the worse on Thursday as initial jobless claims rose from 971,000 to 1.106 million in the week of August 15^th as you can see from the chart below. However, recognize there was a massive decline last week which means the trend is still intact. 

Speed of the decline would put initial claims back to normal in a few weeks. Obviously, that was too good to be true. This is initial claims reading is the BLS survey week, and most analysts expect somewhere around 500,000 jobs created in August.

Non-seasonally adjusted claims rose from 839,000 to 892,000. While that’s not a big increase, usually there are a lot of jobs created at this time of year. In fact, this is the first time unadjusted claims ever increased in the 33^rd week of the year (this past week). This is terrible news, but it’s only one week of data. 

Sometimes the data gets backed up and then comes out in spurts. Also, recognize that this year seasonality is irrelevant because of the huge recession in the spring and the subsequent recovery.

Details Of The Report & Continued Claims

As you can see from the chart below, this was broad based weakness. 36 states had increases in initial claims which was the most states with increases since March 27^th. When there was a broad increase in the first week of July, it quickly reversed course. 

We can expect a resumption of the downtrend in the next 2 weeks. If the decline doesn’t continue, it’s time to take this slowdown seriously. That’s like how I called the 2 week increase in July a slowdown. That increase was related to the spike in COVID-19 cases. This month, COVID-19 cases have been crashing.

To make matters worse, PUA claims were up 53,000 to 543,000. Non-seasonally adjusted claims plus PUAs rose 8% after falling 22% and 19% in the prior 2 weeks. This seems like a one-off increase. There are also 1.3 million people receiving pandemic emergency unemployment compensation. It’s up from about 800,000 in mid-June. It (PEUC) has become a bigger program than PUA.

As the first chart in this article shows, continued claims fell from 15.48 million to 14.844 million in the week of August 8^th. Investors expected that large decrease because initial claims fell last week. This was a massive improvement. In the past 3 reports, continued claims have fallen 702,000 per week on average. 

If that rate continues, we will get to the last recession peak in about 12 weeks. That would be a huge accomplishment and signal the recovery is well on its way. It also signals we need another fiscal stimulus to avoid destruction in the meantime. People can’t afford to stay unemployed for another 4 months. They at least need another $1,200 stimulus check.

Small Businesses Are Headed Backwards

Regulations and restrictions related to the COVID-19 crisis are hurting small businesses the most. Large tech companies are actually benefiting from this COVID-19 crisis. Not only are the small caps in the Russell 2000 underperforming the FANG stocks, small businesses are underperforming the small publicly trade firms. 

The recent decade has been about income inequality and how monopolies are taking control of the economy. This year all the trends were accelerated unfortunately. A stimulus helped working people enough to stave off their financial pain, but that’s coming back with the ending of the $600 in weekly benefits.

As you can see from the chart above, since July the number of small businesses open has been falling. As of August 7^th, 19.5% fewer small businesses were open than before the crisis started. A decline in July makes sense because of the spike in cases, but the acceleration lower in early August doesn’t because cases have declined. 

Many are hoping that if some businesses permanently close, replacements will open in 2021 when COVID-19 is largely over (if a vaccine or treatment comes).

This recession was worse than the last one as the unemployment rate peaked higher and continued unemployment claims are still more than double the last peak. Housing market is on fire and consumers spent money when they had extra stimulus. However, this has still be a disaster for most of corporate America. 

As you can see from the chart below, in July there were 32 bankruptcy filings which is 1 below the March 2009 peak. It’s amazing that stocks troughed in March as bankruptcies peaked. This cycle the stock market bottomed in late March which is 4 months before July. That’s 4 months ahead if that’s the peak. If bankruptcies peak this fall, the market will have been even further ahead.

COVID-19 Update: Cases & Deaths Fall Again

Thankfully, we keep getting good news on COVID-19 because we’re starting to see consumers more nervous now that the unemployment checks are lowered or gone. A decline in cases isn’t enough to spur the economy on its own because people’s behavior has changed. 

We need to see much lower new cases and deaths before everything goes back to normal. That’s why it's good to still follow these data points. It may not be over yet.

There were 45,341 new cases on Thursday which is down from 54,780 last Thursday. 7 day average continues to crash as it’s now at 46,589. There were 1,090 new deaths which is down from 1,284 last Thursday. And the 7 day average is now at 1,001. It will fall below 1,000 in a day of two.