Jobless Claims To Increase Further Next Week

Jobless Claims In Context

Jobless claims are measured nominally, which means comparing them to the past isn’t apples to apples. Before COVID-19, claims were very low on a nominal basis and extraordinarily low on a population adjusted basis. It was by far a new record low. Now, we are in the opposite situation as claims hit a record high. Let’s contextualize the data further because everyone knows that the record high isn’t close to any previous level. Let’s dig deeper.

The top chart below shows the 13 week jobless claims versus the 5 year average as a percentage of non farm payrolls and the total population. 13 week average is valuable because there was a tidal wave of claims this time. It's different from other recessions which start slow and build. Recessions are much quicker than expansions, but the others are slow compared to this shock. Obviously, depressions are longer than recessions, but none are in the chart below which starts in 1967.

As you can see, the coronavirus crisis is already greater than the dotcom bust even though only 1 week of bad data was included. About 2% of the population filed for claims. A scary part is there might be more claims in the next report than the last report. If this percentage more than doubles, this will be the either be the worst 13 week period ever or the worst one since the oil shock. By the way, this crisis has included an oil shock of its own.

The bottom chart above will take longer to have a large jump since it uses 1 year of data. Right now, this recession looks smaller than all the others, but it will spike above some when the next report comes in on Thursday. This will soon be the better chart to look at because comparing a shock to other slow moving recessions doesn’t make sense. 

You need to compare larger swaths of their weakness to this slowdown because It will likely be short lived. We likely won't continually have claims of 3.283 million even though claims should rise in the next report.

If you think the economy will continue to crater because the shutdowns will last another 6 months, by all means compare this week’s data on a nominal basis to other periods. This will be by far the worst recession since the Great Depression. There isn’t data on jobless claims from the 1930s. 

Unemployment insurance became federal law in August 1935. The fact that there wasn’t unemployment insurance in much of the Gear Depression made it worse. You can argue that there being unemployment insurance means this recession won’t get as bad as the Great Depression. 

On the other hand, you have to wonder how much the system can handle with so much stimulus spending and so little taxes. We are testing the limits of MMT theory which suggests the government doesn’t need to worry about its debt.

Jobless Claims Set To Spike

Jobless claims spiked sharply in last week’s report. However, many expect claims to increase further in the next report. We're not sure if the next report will be the apex because everything is uncertain. We know it will be bad because there were more shutdowns in the past week. And, we also have the chart below which shows unemployment insurance related calls to NYC’s 311 line are over double the rate of the prior week.

It would be devastating if claims doubled. There will easily be double digit unemployment in April. Only hope for stocks would be COVID-19 cases coming under control. It would also be helpful if jobless claims don’t spike by as much in other areas. We know NYC was the hardest hit area of the country. NYC might be one of the first areas to recover. 

Let’s hope the areas that are being spared now don’t become the next hotspots. And let’s also hope that the coming warm weather mitigates the spread of COVID-19.

Earnings Estimates Crater Further

Usually, earnings estimates are correlated with stocks, but this time stocks fell before analysts got a chance to lower their estimates. Q1 is going to be the quarter without guidance because no company knows what will happen. Maybe they can provide guidance in positive and negative COVID-19 scenarios. 

As you can see from the table below, the estimate for Q2 EPS growth fell from -2.45% to -7.32%. Q2 will be a bloodbath because the economy will be closed for the first 2 months of it. We could see estimates fall to -15% by mid-April.

Real Consumer Sentiment Reading

Preliminary consumer sentiment report didn’t tell us much about the impact of COVID-19 because the economy wasn’t hurt much in the first week of March. Shutdowns started in the 2nd week of the month. Therefore, the final March sentiment reading gives us a better picture of the despair consumers are facing. 

Preliminary reading was 95.9 and the final reading was 89.1. That only slightly missed estimates for 92. It was down from 101 in February which was near the cycle high. As you can see from the chart below, the index crashed throughout the survey period. It is firmly recessionary as sentiment bottomed at 81.8 in the 2001 recession and 55.3 in November 2008. It seems likely that sentiment will be in the low 60s in the preliminary April report.

Current conditions index fell from 114.8 to 103.7 and the expectations index fell even more. It was down from 92.1 to 79.7. An 11.9 overall decline was the 4th largest drop in the past 50 years. It would have been even worse had the shutdowns started a week earlier. Steepest monthly drop ever was 12.7 points in October 2008. 

If the 7 day average is indicative of the April reading, sentiment will fall another 18.2 points. That would be a 2 month drop of 30.1 points which would be a new record. It could even be worse because shutdowns will grow more widespread. And people will burn through their savings. 

On the other hand, if the virus is contained by mid-April and the economy looks ready to reopen in May, we could see improved sentiment.  

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