The Right Side of Change

Ten weeks straight

This week’s jobless claims data marks the 10th week in a row of new jobless claims over 2m. The total number of people applying for unemployment at one point or another through this crisis totals about 48m now, which is honestly unfathomable to me. Importantly, the continuing claims number fell 3.86m from the prior week, indicating those people have either returned to their jobs or found other employment. While down sharply, continuing claims are still at an insane 21m.

Moral of the story: As the economy is starting to open up across the country, people are returning to jobs, especially in the hospitality and retail sectors, which account for an outsized amount of these jobless claims. Remember the official April unemployment number was 14.7% (5% higher if you include furloughed workers), and it will get worse before it gets better. But economists are expecting that improvement to be quite sharp, bringing the overall unemployment rate to below 10% by the end of the year. 

It’s actually worse

The initial estimate for 1st quarter GDP was a 4.8% contraction, but the second estimate came with a downward revision to a 5% contraction figure. The majority of the adjustment was driven by revised inventory levels. 

Moral of the story: GDP is made of a few different components – consumer spending (about 2/3 of the US GDP growth), government spending (this will be a massive contributor in 2020 given the government’s stimulus spending), investment (business spending), and net exports (this will be significantly impacted by the increasing US-China tensions). Everything but government spending has been seriously hampered by this crisis, and economist are expecting GDP to fall up to 30% in the coming periods. 

Uncle Sam to the rescue

While unemployment skyrocketed to 15% in April, personal income increased 10.5% in April driven by an 89.6% increase in government transfer payments (aka the stimulus from the CARES Act) while economists were expecting incomes to actually fall 2.1% for the month. Despite this increase in incomes, consumer spending fell 13.6% for April, after a 6.9% drop in March. The surge in incomes plus the fall in spending caused the savings rate to jump up to 33%. 

Moral of the story: Consumers are justifiably more cautious, and it’s painfully evident in the consumption numbers. Though sentiment is starting to rebound, no amount of government stimulus is going to matter if consumers don’t go out and spend. Anecdotally, it seems like consumers are making a comeback in states that have reopened – the outdoor patios at restaurants and bars are filling up as people have been freed from the confines of their homes. But I can’t help but think some of this is just an initial excitement of being able to do things again – once people get it out of their system and rationalize their finances, we’ll probably see a moderation in activity until the employment picture starts dramatically increasing.