New York (May 8) – April’s employment report reduced the number of jobs by 20,500,000, the worst that most Americans can remember, although slightly better than expected. The February (-45,000) and March (-169,000) revisions created 214,000 fewer jobs.
The impression gutted the average impression of jobs in the three and six month medium categories. It’s probably worse than the printed word because the unemployment registration systems of many states have collapsed.
The seasonally adjusted unemployment rate increased 90 basis points to 14.7%, down 10.3 percentage points more from March. This is 11.1 percentage points lower than last year. Overall, these are the worst figures for monthly unemployment since the Great Depression.
Seasonally adjusted U-6 unemployment, at 22.8%, was up 14.13 percentage points from a month earlier, and 15.5 percentage points since last year.
Year-over-year average weekly wages rose 7.3%, at a rate more than five percentage points higher than inflation. Real wages rose 5.3%, assuming an average PCE inflation rate adjusted in March of 2.00%. Average monthly nominal weekly wages increased $ 48.69, or 4.9%, and average weekly hours increased by 1/10e an hour, month over month. They were down 2/10e one hour over one year from April 2019.
Analysis: details and perspectives
As of Friday, the April ISM report was printed at 41.5, down 7.6 percentage points from 49.1 last month. Overall, the report says the economy, particularly orders and employment, is slowing faster. Inventories and prices are falling faster, which, along with what will likely be a range of bankrupt producers, may signal demand-driven inflation whenever the United States finds itself on the other side of COVID-19 .
We have entered a whole new world, albeit a temporary one, with the COVID-19 virus. The last 50 days of closure have disrupted what had been a mostly optimistic economy. We are currently in a blind spot, with only a small number of Americans diagnosed (although additional tests will increase this number) and aggressive, even heroic, efforts on the part of public health authorities to contain a larger gap and “Bend the curve” of the summit so as not to overwhelm our health system.
Today’s figures reflect a sharp drop in wages in a number of factors, including household income. Taken together with the reduction in household wealth that we discussed last month here, this will deeply affect consumption, and thus reduce the multiplier effect that drives much of the US economy. We believe that persistent fears about COVID-19, the payment of overdue invoices and the strengthening of consumer balance sheets will significantly reduce GDP for at least a year; probably three or more. We anticipate many more personal and business bankruptcies, and even bankruptcies in some poorly managed municipalities. But in addition to these worries about an economy coming out of action, a report released today New york times There is also concern that COVID-19 will be with us to varying degrees for at least 18 to 24 months:
“… We need to be ready for at least another 18 to 24 months of significant Covid-19 activity, with hot spots appearing periodically in various geographic areas. “
The study also assumes ongoing mitigation efforts, not a “reopening”.
We continue to have these other four overarching central economic concerns of COVID-19:
- Negative interest rates and deflation: liquidity entering the bond market and 10 years now posting a rate below 0.7% with core inflation of 2.0%, bond investors actually pay for the security of the bonds from the Treasury.
- On the supply side: suppliers will probably not be able to meet their demand the day after COVID-19. We already see this in the ISM report, where stocks are described as “too low”. Service-related businesses that have “turned down the hatches” against COVID-19 are already seeing lower productivity and greater difficulty finding workers who, in some cases, earn more from unemployment than from paychecks.
- On the demand side: we fear deflation, because demand is decreasing while people are working hard to avoid the virus. This is troubling for highly leveraged companies where cash flows may require debt restructuring. The continuing decline in oil prices has put an end to many hydraulic fracturing operations, resulting in layoffs of well-paying jobs that are not yet reflected in the March employment report. Inventory losses by retail investors will also have an impact on the wealth of consumer spending.
- Default: Our main concerns are now the liquidity and contagion of defaults in China, as well as defaults on domestic loans. China owes American, European and British banks and other creditors, including Asian / Chinese investment funds. Our long-standing concerns about the rollover of foreign currency bonds denominated in dollars, euros and pounds sterling – concerns that we have had since at least January of last year – have simply been exacerbated by the coronavirus, as the reversals of Chinese creditors and other creditors “the debts will be much more difficult in the foreseeable future.
GDP in the euro area fell 3.8% in the first quarter of 2020, compared to 0.1% in the fourth quarter of 2019. This is the largest decline since the start of the time series in 1995. Growth in the EU27 fell by 3.5% compared to 0.2% in Q4 2019.
Chinese GDP fell 6.8% in the first quarter of 2020, exceeding all negative expectations. This will continue to exacerbate the record level of defaults in China, including defaults from state-owned enterprises, which have been of concern to us for a long time and which are discussed above.
The method of calculating Japan’s GDP is being revised to take into account the data collection difficulties resulting from COVID-19. The dataset will be available on May 18e.
COVID-19’s generalized “black swan” pandemic is hitting the US economy harder and faster than we ever could have imagined. We are almost certainly in depression, defined as a decline of 10% or more in GDP or will be soon. The optimism about a V-shaped recovery is considerably overestimated in our opinion. We have been considering an “L” shaped “recovery” for more than two years and possibly up to five years for the reasons we have explained here.
Stay informed of our prospects by viewing our job reports here on Seeking Alpha.
Let’s take a look at our exclusive calendar of job creation by average weekly wages for the July Jobs Report:
Job creation in April by average weekly salary Source: The Stuyvesant Square Consultancy, compiled from BLS establishment data for April 2020. Jobs have been lost in all private pay classes and the amount of losses has been simply devastating.
The number of people employed in April was 133,403,000, down 22,369,000 from March and 23,293,000 from the same period last year. Some 156,481,000 people were in the labor force, down 6,432,000 from last month and 6,065,000 from last year. The participation rate dropped to 60.2%, down from 62.7% last month and 62.8% last year.
As we review the other economic data, please note that the COVID-19 virus became common in the United States after December and that the closure of the national emergency did not begin until March; therefore, the data is lagging behind. Reporting for April, when available, is a much better indicator of the effect of the virus on the US economy than data for March. The April data is expected to be devastating, as it is the first full month after the discontinuation of COVID-19. Likewise, when we are on the other side of the pinnacle of the virus, lagging indicators will then likely paint a continuing pessimistic view of the economy, even if things may be improving.
Oil prices and geopolitical concerns
Fuel prices crossed the $ 2.00 per gallon threshold in April to $ 1.938. Gas prices for March are 16.79% lower than last month and 32.73% lower than last year.
West Texas Intermediate crude oil prices continue to be beaten by Russian and Saudi efforts to eliminate hydraulic fracturing in the United States. They decreased 10.47% from last month to date and are 61.47% lower than the same period last year.
Almost all of the geopolitical considerations that we usually address here are now completely overshadowed by the global COVID-19 pandemic. Circumstances have not changed significantly since our February report; however, there is increasing pressure in Congress to hold China accountable for its inaction at the onset of the crisis, as well as for its efforts to hoard personal protective equipment.
Other macro data
February JOLTS survey, latest data available, published April 7e, showed 130,000 fewer jobs in January and 166,000 fewer jobs than in February 2019. The annual slowdown in job creation was significant and consistent with the year-on-year change compared to the JOLTS in December 2018 report, when 1.666 million more new jobs were created than in December 2017.
Advance US retail and food service sales for March (which are adjusted for seasonal variation and differences between holidays and public holidays, but not for price variations) amounted to 483 , $ 1 billion, down 8.7% from the previous month and 6.7% below March 2019. The next report is expected on May 15e. New orders for manufactured durable goods in March, published on April 24e, decreased $ 36 billion or 14.4% to $ 213.2 billion.
The February TSI is not yet printed. For January, the latest available data, the TSI was 0.4, up from -0.4 in December and down from 0.7 last year.
Debt service as a percentage of household debt increased again before the start of the COVID-19 crisis; it will experience a sharp increase in the first quarter of 2020, once it is released. Q3 2019 data showed debt service as a percentage of disposable income at 9.73158, slightly higher than it was in Q3 2019, 9.6902%, the lowest level since the records began to be held 40 years ago. It exceeded 13% before the Great Recession. We expect this percentage to be even higher in the second quarter of 2020 as layoffs decimate the economy and household income.
The speed of the M-2 dropped further in Q4 2019. We would have liked to see the speed improvement of the M-2 appear to be on track in 2018. But although we are discouraged that it will continue to drop we note that it is probably due to the easing of the Fed. We expect it to crater sharply during the Q1 2020 GDP review, given the actions of the Fed and the craterization of the economy due to COVID-19.
We note these other macroeconomic developments since our March employment report:
- February wholesale trade report, reported April 9e, posted sales down 0.8% over one month and up 1.1% over a year. Inventories decreased 0.7% month-over-month and 1.3% from last year. The inventory-to-sales ratio for February was 1.31, down from 1.34 last year.
- Building permits for March, published on April 16e, were down 6.8% from February but down 5% from last year. Housing starts fell 22.3% month-over-month, but increased 1.3% year-over-year.
- The ISM Manufacturing report, as mentioned above, for April, released last Friday, showed growth at 41.5, down from 49.5 in March. The April non-manufacturing ISM report, released Tuesday morning, was printed at 41.8, down 10.7 percentage points from 52.5 in March.
- Personal income and expenses for March, published April 30e, posted personal disposable income down 2% month-on-month in current dollars and 1.7% in chained 2012 dollars. Personal income in current dollars also decreased 2% from last month.
- Personal consumption expenditure (PCE) for March fell 7.5% in current dollars and 7.2% in chained 2012 dollars.
- The IBD / TIPP economic optimism index at the end of April rose slightly by 1.9 points, or 4%, compared to the end of March, to 49.7. (Anything over 50 indicates growth.)
- Labor productivity in the first quarter of 2020 decreased by 2.5%, while average unit costs increased by 4.8%. Average hourly wages fell to 6.8%.
The Fed has made it clear that it will be ready to maintain liquidity in the markets. Reduced average inflation for personal consumption, less food and energy, or “Real PCE” for the Dallas Fed, is 2.0% year-on-year. The PCE real price deflator, which would be the Fed’s preferred inflation measure, stood at 1.7% for March.
The yield curve widened, albeit at sharply reduced overall rates, given the Fed’s emergency measures. We started 2018 with a 3-month / 10-year spread in the yield curve of almost 102 basis points, or only half of the roughly 200 basis points that started in 2017. We started 2019 at just 24 points basic; 2020 34 bps. Yesterday, May 7e, the 3-month / 10-year yield curve was separated by 52 basis points, thanks to the Fed’s rate cut.
Forecasting GDP is extremely difficult in today’s environment, since the quantum of economic change has been so volatile, measured in several percentage points instead of tens of basis points. Without knowing the outcome of the pandemic, or the consequences of its reopening, an estimate would now be entirely speculative. We could have a better framework for estimating with the May Jobs Report in early June.
In equities, the recommendations of our portfolio remain broadly the same. We advise “Buy on the dip” investors to be wary of the fact that we may face an “L” shaped recovery (or worse), as we do not know when this recovery may occur.
Outperformance: trucking and delivery services and other transportation of goods, both on their need during the COVID-19 crisis and on speculation of consolidation and acquisition, especially since small trucking companies continue to do facing challenges on the decline in freight rates; residential REITs that own real estate in sectors identified as “areas of opportunity” under the 2017 Tax Reduction and Job Creation Law; “#StayHome” stores on-demand video and online gaming space and home delivery services and in the collaborative space of the online workspace. Health care stocks in the face of the COVID-19 crisis will be volatile, but producers of PPE and medical equipment will fare well. We continue to believe that the CHF is sheltered from domestic and geopolitical uncertainty and likely geopolitical tensions that we expect to arise after the crisis.
Almost all the other sectors will be on the market and the performances will be poor to be intermediate. We would avoid regional banks with a large portfolio of small and medium-sized oil drillers and commercial real estate.
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Additional disclosure: The opinions expressed, including the results of future events, are the opinions of the firm and its management only as of today, May 8, 2020, and will not be revised for events after this document has been submitted to the Seeking Alpha editors for publication. The statements included do not represent and should not be considered as investment advice. You should not use this article for this purpose. This article includes forward-looking statements about future events that may or may not develop as the author decides. Before making any investment decisions, you should consult your own investment, commercial, legal, tax and financial advisers. We work in partnership with the directors of Technometrica on survey work in certain elements of our company.