The Recovery: With Reversed State Openings, Expect A Flattening

The “Shape of the Recovery” graph that I drew a couple of months ago appears to be playing out almost exactly as forecasted (guessed!). The outlook for Q2, just ended, is now congregating around that -40% mark. We will see the first pass at Q2 GDP at month’s end. Stay tuned!

April was the bottom of the Recession, that’s for sure. It looks like May and part of June had the sharp upward pop, the steep part of the initial “v,” and that appears to have been confirmed by BLS’s employment reading for June (see below). Yet, despite the equity market’s initial ebullience, it is pretty conclusive that we have entered the flattening portion of the Recovery.

• Despite the “surprising” employment data, between 17 million and 22 million are still unemployed. For context, Continuing Unemployment Claims were 1.7 million on February 1^st;
• Homebase, the employment services company for small business, indicated that 20% of small businesses have already closed or will close. That represents several million of the 22 million unemployed; i.e. these jobs aren’t coming back!
• The significant rise in coronavirus case counts has caused nearly half of the states to halt or reverse openings. That alone will have a chilling impact on the Recovery’s shape!
• The Census Bureau’s Business Pulse Survey, released June 20^th, prior to the reopening retrenchments, indicated then that more than 42% of businesses still see their operating revenues falling;
• 41% of those polled in the Census Bureau’s Survey believe it will take more than six months for business to return to normal; more than 9% believe business will “never” return to its pre-pandemic state;
• The University of Chicago conducted a survey (released June 6^th) which indicated that 33% of those unemployed do not see their jobs returning; that 72% say that are still avoiding restaurants; and that 38% feel “hopeless about the future!”

Employment

As seen in the table and chart, the week ended June 20^th continued the streak of very weak employment gains as measured by Initial Claims (IC) and Continuing Claims (CC) data. In fact, the IC number for the week ended June 27^th disappointed markets once again at 1.427 million, barely different from the 1.482 million the prior week. Consensus was a number closer to 1.35 million, and the downslope of the IC weekly data has now flattened considerably. The significant meaning here is that, despite the reopenings, businesses have continued to shed jobs.

Another disappointment was in the CC data. This series peaked at 24.9 million in early May (week ended May 9^th). For context, this was 1.687 million the week ended February 1^st. CC fell rapidly in mid-May (the beginning of reopenings, falling nearly 4 million the week ended May 16^th. But since then, the data has stalled, with the claims falling only 1.5 million total from the May 16^th week through the week ended June 20^th. Even more disappointing, the June 20^th week actually showed a slight increase in CC (+59,000).

But, despite these readings, BLS’s Payroll Survey (week ended June 13^th) showed a 4.8 million pop in employment, far exceeding economists guesses which averaged 3.2 million, and taking the unemployment rate (U3) down to 11.1% from May’s 13.3%. (U6 fell to 18.0% from 21.1%.)

The two approaches appear contradictory. Realize that the unemployment rate’s denominator is the labor force, and it isn’t a stable number, especially around recessions. The labor force data comes out monthly with a one-month lag.

The April 1^st labor force level was 8.125 million lower than it was on January 1^st. People lost their jobs and weren’t looking (especially since the economy was locked down). A shrinking labor force distorts the unemployment rate with a bias to the downside. The formula for the unemployment rate (decimal form) is (1-(total employed/labor force)). (This is then converted to a percentage.) A lower labor force makes the percentage of employed higher (i.e., employed/labor force), and therefore lowers the unemployment rate (i.e., 1- pct. employed). 

To reconcile all of this, between April and June, 42%, or nearly 3.5 million of those 8.125 million had returned to the labor force. Many of these were rehired without ever having filed for or collected unemployment. That helps explain BLS’s 4.8 million net job growth.

Nonetheless, it really matters little what number we choose, be it the Continuing Claims data (22.3 million unemployed), or BLS’s Household Survey (17.8 million unemployed), the number of unemployed remains unfathomable. And now we have about half of the states halting or reversing their reopenings as coronavirus cases spike. Let’s also remember that BLS’s Employment Survey for June took place prior to the jump in infection counts and prior to the reopening pullbacks. The next BLS measurement week is the week of July 12-18, just a week away. Likely July’s result won’t continue the May-June trend.

The Fed

One of the accompanying charts shows the Y/Y percentage changes in M1. Not even during the financial crisis did money creation come anywhere near what we have seen since March. The other chart shows the growth of the Fed’s balance sheet; once again, ’08-’09 pales in comparison and rapidity. The balance sheet is now over $7 trillion; it was under $4 trillion just weeks ago. All of this market intervention simply distorts true price discovery. Markets are convinced that the Fed has their backs and won’t let equity or bond prices crash. 

Markets are also convinced that the Fed and Congress are conjuring up new ways to do additional free money helicopter drops. Henry Kaufman, former Chief Economist for Salomon Brothers, recently opined in the Financial Times that U.S. Capitalism has been shattered as a result. Generally speaking, when money creation runs wild, the price of gold rises. And, indeed, the price of gold has risen from $1,539/oz. on December 31^st to $1,786/oz. as of July 2^nd, or 16.1%. That’s a far better performance than the S&P 500 (-3.1%).

Bankruptcies

The chart and table show that bankruptcies have continued to accelerate with the annual trend rate for the Bloomberg major bankruptcy series now at 258 for 2020.

For context, there were 139 in 2019 and 118 in 2018. The recent Fed stress test results worried the Fed.  They are concerned about oncoming losses for the stress test banks (the 33 largest U.S. banks) which they estimate to be in the neighborhood of $700 billion. This is bound to have a huge influence on bank lending and the shape of the Recovery, i.e., flattening (debt holder agony and more layoffs).

Conclusions

• The rapid rise in coronavirus cases has reversed or halted reopenings in almost half of the states, guaranteeing that the Recovery’s trajectory flattens significantly;
• Employment surprised to the upside once again for June, most of which appeared to be from labor force re-entrants. The level of unemployment claims and the lack of much movement to the downside is not a good sign. Businesses have continued to layoff at a rapid rate even during the reopenings. The BLS’s July Employment Report looks like it will be significantly weaker than May’s or June’s;
• The Fed continues to distort financial market pricing, and markets are now behaving as if that behavior is permanent and that the Fed will never let financial asset prices move significantly lower; it’s balance sheet grew more in two months than during the entire financial crisis of ’08-’09, and the money supply has exploded to the upside. Rapid money growth and rising gold prices have, historically, gone hand in hand;
• As documented in this and past blogs, bankruptcies continue to accelerate; expect significant economic consequences.