New York (May 8) – The April jobs report printed down 20,500,000 fewer jobs, the worst most living Americans can recollect, although somewhat better than anticipated. Revisions for February (-45,000) and March (-169,000) netted an additional 214,000 fewer jobs.
The print eviscerated the average jobs print in the three month and six-month average categories. It is probably worse than the print because so many states’ unemployment registration systems crashed.
The seasonally adjusted unemployment rate ticked up 90 bps, to 14.7%, down a further 10.3 percentage points from March. It is 11.1 percentage points worse than last year. Overall, these are the worst monthly unemployment numbers since the Great Depression.
The seasonally adjusted U-6 Unemployment, at 22.8%, was up 14.13 percentage points from last month, and up 15.5 percentage points since last year.
Nominal year-on-year average weekly wages increased by 7.3%, at a rate more than five percentage points higher than inflation. Real wages increased by 5.3%, assuming the March Trimmed Mean PCE inflation rate of 2.00%. Month-on-month nominal average weekly wages increased a huge $48.69, or 4.9%, and average weekly hours, increased 1/10th of an hour, month on month. They were down 2/10th of an hour year on year from April 2019.
Analysis: Details and Outlook
Last Friday’s April ISM Report printed down at 41.5, down 7.6 percentage points from last month’s 49.1. Overall, the report says the economy, particularly orders and employment, is slowing faster. Inventories and prices are declining faster, which – together with what will likely be an array of bankrupted producers – may signal demand-pull inflation whenever the US comes to the other side of COVID-19.
We have arrived at a whole new, albeit temporary, world with the COVID-19 virus. The last 50-odd days of the shut-down have disturbed what had been a mostly optimistic economy. We are in a blind spot for the time being, with only a small number of Americans diagnosed (though additional testing will raise that number) and aggressive, even heroic, efforts by public health authorities to contain a larger spread and “bend the curve” of the apex so as to not overwhelm our healthcare system.
Today’s numbers reflect a deep decline in wages in a number of factors, not least is household income. Taken with the reduction in household wealth that we discussed last month, here, this will profoundly affect consumption, and thus reduce the multiplier effect that drives so much of the US economy. We suspect that continuing fears over COVID-19, paying past-due bills, and strengthening consumers’ balance sheets will reduce GDP substantially for at least a year; likely three or more. We foresee many more bankruptcies of both individuals and companies, and even bankruptcies of some less-than-well managed municipalities. But in addition to these concerns about an economy exiting a shutdown, a report today in the New York Times also raises fears that the COVID-19 will be with us in varying degrees for at least 18 to 24 months:
“…we must be prepared for at least another 18 to 24 months of significant Covid-19 activity, with hot spots popping up periodically in diverse geographic areas.”
The study also assumes ongoing mitigation efforts, not a “reopening.”
We continue to have these other four overriding central economic concerns from COVID-19:
- Negative interest rates and deflation: with cash flowing into the bond market and the 10-year now printing below 0.7% with core inflation at 2.0%, bond investors are effectively paying for the safety of Treasury bonds.
- Supply side: Suppliers will likely be unable to meet their demand in the aftermath of COVID-19. We’re already seeing this in the ISM report, where inventories are described as “too low.” Service-related businesses that have “battened down the hatches” against COVID-19 are already seeing reduced productivity and greater difficulty finding workers who are, in some instances, earning more on unemployment than in their paychecks.
- Demand side: We fear deflation as demand drops off as people hunker down to avoid the virus. This is troubling for heavily leveraged companies where cash flow may require debt restructuring. Continuing low oil prices have shuttered many fracking operations, causing layoffs of well-paying jobs that have not yet been reflected in the March jobs report. Stock losses by retail investors will also impact the wealth effect in consumer spending.
- Defaults: Our central concerns now are liquidity and contagion from 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 dollar, euro, and pound denominated offshore corporate foreign currency bonds – concerns we’ve had since at least January of last year – were merely exacerbated by the coronavirus, as rollovers of both Chinese and other creditors’ debts will be much more difficult in the foreseeable future.
Eurozone GDP declined 3.8% in 2020Q1, down from 0.1%, in 2019Q4. It is the sharpest decline observed since the time series started in 1995. EU27 growth declined 3.5%, down from 0.2% in 2019Q4.
China’s GDP decreased 6.8% in 2020Q1, exceeding all negative expectations. This will continue to exacerbate China’s record level of defaults, including defaults for state-owned enterprises, about which we have been long concerned and which are discussed further above.
Japan’s GDP calculation method is being revised to accommodate data collection difficulties arising from COVID-19. The data set will be available May 18th.
The “black swan” widespread pandemic of COVID-19 is hammering the US economy harder and faster than we ever could have imagined. We are almost assuredly in depression, defined as a decline of 10% or more in GDP or soon will be. Optimism about a “V”-shaped recovery is substantially overstated in our view. We’re looking at an “L”-shaped, um, “recovery” for more than two and perhaps up to five years for reasons we explained here.
Keep apprised of our outlook by checking our jobs reports here on Seeking Alpha.
Let’s look at our exclusive schedule of jobs creation by average weekly wages for the July jobs report:
April Jobs Creation by Average Weekly Wage Source: The Stuyvesant Square Consultancy, compiled from BLS Establishment Data for April 2020. Jobs were lost in all private payroll classes and the quantum of losses was 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 individuals were in the workforce, down 6,432,000 from last month and down 6,065,000 from last year. The labor participation rate fell to 60.2%, down from last month’s 62.7% and down from the 62.8% last year.
As we review the other economic data, please take note that the COVID-19 virus first became mainstream in the USA after December and the shutdown for the national state of emergency did not begin until March; so, data is lagging. Data reporting for April, where it is available, is a far better indicator of the effect of the virus on the US economy than more lagging data from March. April data is expected to be devastating, given it is the first full month of the COVID-19 shutdown. Likewise, when we are on the other side of the apex of the virus, lagging indicators then will likely paint a continuing pessimistic view of the economy, even if things are, perhaps, improving.
Oil Pricing And Geopolitical Concerns
Fuel prices broke the $2.00 per gallon threshold in April, at $1.938. Gasoline 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 battered by Russian and Saudi efforts to knock out US fracking. They have decreased 10.47% from last month as of today, and are 61.47% lower than the same time last year.
Nearly all the geopolitical considerations we ordinarily address here are now starkly overshadowed by the global COVID-19 pandemic. Circumstances have not changed materially since our February report; however, there is growing pressure in Congress to hold China accountable for its inaction early in the crisis, as well as its efforts to hoard personal protective equipment.
Other Macro Data
The JOLTS survey for February, the latest available data, released April 7th, showed 130,000 fewer job openings from January, and 166,000 fewer jobs than had been created in February, 2019. The year-on-year slowdown in jobs creation has been significant and consistent from the year-on-year change from the December 2018 JOLTS report, when 1.666 million more new jobs had been created than had been created in December of 2017.
Advance U.S. retail and food services sales for March (which is adjusted for seasonal variation and holiday and trading-day differences, but not for price changes) were $483.1billion, a decrease of 8.7% from the previous month, and 6.7% below March 2019. The next report is due May 15th. March new orders for manufactured durable goods, released April 24th, decreased $36 billion or 14.4%, to $213.2 billion.
The TSI for February has not yet printed. For January, the latest available data, the TSI printed at 0.4, up from December’s -0.4 and down from last year’s 0.7.
Debt service as a percentage of household debt was moving up again before the COVID-19 crisis hit; it will likely spike sharply for 2020Q1, once it is released. Data for 2019Q4 showed debt service as a percentage of disposable income at 9.73158, slightly higher than what had been for 2019Q3, 9.6902%, the lowest level since records started being kept 40 years ago. It ran over 13% prior to the Great Recession. We expect that percentage to be even higher in 2020Q2 as layoffs decimate the economy and household income.
M-2 velocity dipped further in 2019Q4. We would have liked to see the improvement in M-2 velocity that seemed to be on track in 2018. But while we are disheartened that it continues to fall, we note it is likely attributable to Fed easing. We expect it will crater sharply when revised for the 2020Q1 GDP, given Fed actions and the cratering of the economy from COVID-19.
We note these other macro developments since our March jobs report:
- The wholesale trade report for February, reported April 9th, showed sales down 0.8% month on month, and up 1.1% year on year. Inventories were down 0.7%, month on month, and down 1.3% from last year. The February inventory to sales ratio was 1.31, down from 1.34 last year.
- Building permits for March, released April 16th, were down 6.8% from February but up 5% from last year. Housing starts decreased a massive 22.3%, month to month, but were up 1.3% year on 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 ISM Non-manufacturing report for April, released Tuesday morning, printed at 41.8, down 10.7 percentage points from 52.5 in March.
- Personal Income & Outlays for March, released April 30th, showed disposable personal income down 2%, month on month, in current dollars, and down 1.7% in chained 2012 dollars. Personal income in current dollars was also down 2% from last month.
- Personal consumption expenditures (PCE) for March was down a huge 7.5% in current dollars and down 7.2% in chained 2012 dollars.
- The IBD/TIPP Economic Optimism Index, at the end of April increased slightly by 1.9 points, or 4%, from the end of March, to 49.7. (Anything above 50 indicates growth.)
- Labor productivity in 2020Q1, decreased 2.5%, while average unit costs increased 4.8%. Average hourly wages decreased at 6.8%.
The Fed has made clear that it will be at the ready to maintain liquidity in the markets. Trimmed mean inflation for personal consumption expenditures, less food and energy, or “Real PCE” for the Dallas Fed is at 2.0%, year on year. The real PCE price deflator, reportedly the Fed’s preferred measure of inflation, printed at 1.7% for March.
The yield curve has widened, albeit at sharply reduced overall rates, given the Fed’s emergency actions. We started 2018 with a spread of the 3 Month/10 year yield curve two of nearly 102 bps, just half the 200 or so bps that started 2017. We started 2019 just 24 bps apart; 2020 34 bps. As of yesterday, May 7th, the 3 Month/10 year yield curve was separated by 52 bps, courtesy of the Fed rate cut.
GDP predictions are extraordinarily difficult in the current environment as the quantum of economic change has been so volatile, measured in multiple percentage points instead of tens of basis points. Not knowing the outcome of the pandemic, or the consequences of re-opening, an estimate now would be entirely speculative. We may have a better framework for estimate with the May jobs report in early June.
In equities, our portfolio recommendations remain largely the same. We advise “Buy on the dip” investors to be wary that we may be facing an “L”-shaped (or worse) recovery as we don’t know when this recovery might occur.
Outperform: Trucking and delivery services and other freight transports, both on their necessity during the COVID-19 crisis and on speculation of consolidation and acquisition, especially as smaller trucking firms continue to face challenges on the drop in freight rates; residential-oriented REITs that own real estate in sectors identified as “opportunity zones” under the Tax Cut and Jobs Creation Act of 2017; “#StayHome” stocks in the on-demand video and online gaming space and home delivery services and in the online workspace collaboration space. Healthcare stocks addressing the COVID-19 crisis will be volatile, but PPE and medical equipment producers will do well. We continue to believe CHF is the safe haven from domestic and geopolitical uncertainty and the likely geopolitical stresses we expect to arise past the crisis.
Virtually all the other sectors will be at market perform and performance will be poor to be middling. We would steer clear of regional banks with a heavy portfolio of small and medium sized oil field drillers and commercial real estate.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The views expressed, including the outcome 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 was submitted to Seeking Alpha editors for publication. Statements herein do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. This article includes forward looking statements as to future events that may or may not develop as the writer opines. Before making any investment decision you should consult your own investment, business, legal, tax, and financial advisers. We partner with principals of Technometrica on survey work in some elements of our business.