Unemployment Rate Might Be 23.8%

Jobless Claims Fall Again

Some traders decided that the stock market always rallies on Thursday because it seems like the stock market likes high jobless claims in the near term. They believed that because stocks would have been on a long Thursday winning streak if it wasn’t for the Gilead news last Thursday. As you know, trading isn’t that easy. 

Stocks fell after the latest jobless claims report. At a certain point stocks get overbought in the near term. A trend of decreasing initial claims continued though which is moderately good news. Unemployment rate is in the low to mid 20s. How many more people can file for unemployment when the rate is already that high?

Specifically, there were 3.839 million new claims in the week of April 25th. That’s below the prior week’s total which was 4.42 million. It was revised higher from 4.427 million, meaning there was hardly a change to the prior week’s data. This week’s report was expected to show 3.5 million which means it was worse than expected. Economists have quickly realized the number of claims is falling each week. The chart below is remarkable. 

As you can see, there have been over 30 million claims in the past 12 weeks. Prior record was near 7.5 million in the early 1980s recession and the late 2000s recession. There have been 30.307 million claims in the past 6 weeks. The U.S. economy only lost 8.6 million jobs in 2 years during the great financial crisis.

7 states saw initial claims rise this week. Greatest increases were in Washington and Georgia which had claims go up 62,300 and 17,800. Remember, Georgia has been starting to reopen its economy, but this reading is from last week. Florida reported the most claims in this report as it had 432,465 claims which was above California’s 328,042. That’s the first week since March 21st that California didn’t lead the report. Both states saw declines. 

Florida likely saw the most claims because last week the AP reported that 7 out of every 8 Floridians who filed a claim from the 3 weeks in mid March to early April were waiting for it to be processed. Florida’s website broke and people needed to wait in line outside with a paper form. That’s terrible because people aren’t supposed to be in large gatherings. It’s great to see many of those waiting had their claims processed. California and Texas had 2/3rds of claims backlogged and New York had 30%.

Continuing claims from the week of April 18th rose from 15.818 million to 17.992 million which is way above the previous record high of 6.635 million. If you assume the ratio of continuing claims to the unemployment rate holds, then the current unemployment rate is 23.8%. That’s the likely rate we will see in the May report. Next Friday, the April report will show an unemployment rate in the low to mid teens.

Unemployment rate could be lower because older people are leaving the workforce for good. That would decrease the labor force participation rate. We obviously don’t know if people above 65 will come back to the labor market. They might be hesitant to come back because they are the most at risk of dying from coronavirus. If you are 67 and stopped working, you might want to wait for a vaccine to come out before you start again. 

If the vaccine comes in 2 years, you will be 69 at that point. For health or motivation reasons, people might not want to go back to work. Also, employers might not want to hire people who haven’t been in the workforce for that long. Employers will only hire people like that when the labor market gets tight. It might not be tight within 2 years of this pandemic.

Terrible PCE Report

Personal income growth fell 2% monthly in March. As you can see from the chart below, there was only one blip worse than this since the last recession. Consumer spending fell 7.5% which was the worst decline since at least 1959 when the data started being calculated. 

Headline yearly inflation was 1.3% which fell from 1.8%. Core inflation was 1.7% which fell from 1.8%. We can expect negative inflation at some point in this expansion. Inflation rates will plummet in the April report. Oil prices briefly went negative. Inflation obviously fell substantially. Real disposable income growth was 0.1% yearly. Real consumer spending growth was -5% yearly.

Record Spike In Personal Savings Rate

Most important aspect of the PCE report was probably the boost in spending. Obviously, we already knew that inflation, spending, and income fell. March is a long time ago. That’s when the recession first started. Savings rate is interesting because its spike might be more sustainable or it could signal there is pent up demand. Specifically, as you can see from the chart below, the saving rate increased from 8% to 13.1% which is the highest rate since November 1981. 

Even with all the geopolitical woes and recessions since 1959, there has never been this much of a monthly spike in the savings rate. Uncertainty, combined with the fiscal stimulus and the natural decline in spending because people aren’t leaving the house is causing this heightened savings rate.

Question is if this is a new normal or if there is pent up money waiting to be spent. Personally, I think it’s a combination of the 2. Savings rate is going to slowly decline after the pandemic ends. However, uncertainty is going to keep it higher than where it was before this recession started for at least a few quarters. 

There is pent up demand for services such as haircuts. There will also be people who learn from this recession and save more because they didn’t have enough money saved up prior to it. That’s bad for the long run consumption rate. If this recession ends quickly, people are less likely to hold onto the lessons they learned this spring. 

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