Jobless Claims Fall Sharply

Very Good Jobless Claims Report

The jobless claims report was very good which is a great sign because we’ve recently seen some weak data. Also, we need people to leave continuing claims before their benefits run out. Furthermore, this was the survey week for the BLS report. We haven’t seen a decline in COVID-19 cases and deaths recently which could slow the economy’s reopening. In fact, the Oxford Economics’ recovery tracker fell in the first week of September. It’s basically where it was 2 weeks prior.

We are painstakingly waiting for the COVID-19 tests from Abbott to be distributed to the governors. Abbott’s antigen test won’t be the only fast cheap test, but it will be the first which is why some are following it the closest. At the very least, these tests lower the chance of a 3rd wave. A real wave is the onslaught of new testing, vaccine results, and new treatments that are coming in the next few months. Abbott’s tests will be sent next to the states starting next week.

Seasonally adjusted initial claims fell from 893,000 to 860,000 which was 10,000 above estimates. Let's focus on the unadjusted data though. That number was even better as claims fell from 866,000 to 790,000 which was a new cycle low. This followed 2 weeks of increases. 

As you can see from the chart below, there was a major decline in unadjusted claims when including PUAs because PUAs also fell. They were down from 868,000 to 659,000. For the past 2 weeks we had been expecting PUAs to fall because the increase was mainly because of California which has said there’s a lot of fraud.

As you can see from the chart below, the decline in California finally came PUAs fell 236,000. Some economists say claims aren’t as bad as the numbers say (because of fraud), but it’s still terrible. They aren’t thinking like investors. If the labor market keeps improving, that's optimistic. You can’t expect the labor market to go back to normal overnight. 

Most are expecting there to be a strong recovery once Abbott’s tests become mainstream, but we’re looking at past data right now. No one thought initial claims were going to magically fall back to 300,000. Cyclical stocks can rally as long as the recovery keeps going. This solid jobless claims report tells me the monthly jobs report will be strong again. It will probably show fewer jobs added than in August, but the unemployment rate should fall again. The trend is continuing.

We also got a nice decrease in continued claims as they fell from 13.544 million to 12.628 million which is a new cycle low of course. Continuing claims have fallen 6 of the past 7 weeks by an average of 618,000 per week. If they keep falling at that rate, they will fall below 10 million by the week ending October 10th and below 3 million by Christmas.

In about 5-6 weeks, many of the benefits that started being paid out when people lost their jobs in March will run out. Some will be moved onto continuing PUECs. There will be a lot less of an issue if millions of people can get their jobs back before then. 

Keep in mind, 10 million continuing claims is still almost double the peak in the last recession. Part of the reason there were so many continuing claims is that almost everyone in this recession lost their job at the same time: from March to April. It’s difficult to tell if the fast acting tests will come in time to create jobs rapidly before these people’s benefits end.

New Record In Retail Sales

August’s retail sales report wasn’t great, but it wasn’t terrible given the decline in the $600 of extra weekly unemployment benefits. As you can see from the chart below, retail sales got back above the February level 3 months ago. Sales are now 1.9% above that peak after bottoming at -21.7%. Monthly sales growth was 0.6% which fell from 0.9% and missed estimates by 0.4%. 

Autos were weak as excluding autos monthly sales growth was 0.7% which missed estimates by 0.3% and fell from 1.3%. Growth was the same without gas and autos which missed estimates by 0.4% and fell from 1.1%. Worst part of the report was control group sales which fell 0.2% which was down from July’s 1% growth and missed estimates by 0.7%.

Clothing sales were up 2.9% monthly, but they are still down 20% from February. Core retail sales are up 5% from February. Non-store sales are up 21%, but there was no monthly growth in August. That implies some shopping switched back to physical stores. 

We are still living with the pandemic, and can only imagine the shift that will take place when this virus is over. That shift isn’t priced in because the consensus is in the long run most shopping will be online. That’s correct, but in the short run i.e. 2021, shopping will go back to the way it was before the pandemic for the most part.

To be clear, online is still doing well as its yearly growth was 22.4%. It just lagged on a sequential basis. Strongest part of this report was food services and drinking sales which were up 4.7% monthly and down 15.4% yearly. Yearly growth was -19.4% in July. Growth has been steadily improving since the bottom in April. Restaurants that aren’t allowed to do indoor dining will be in trouble when the weather cools down. No one will want to eat in a tent in December.

Conclusion

Jobless claims report was very strong on a rate of change basis. Obviously, we know the leisure and hospitality industry is still in disaster mode. Still, it’s good to see improvement as we steadily make our way towards sub 10 million continued claims this fall. 

Retail sales report wasn’t great, especially if you look at the control group. When you consider that people lost out on $600 per week, this wasn’t a bad result. In the coming months the unemployment rate will fall which should allow the holiday shopping season to be ok. There probably will be very low single digit yearly spending growth. 

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