There were two separate events of economic significance the week ended September 5th. First, the financial markets displayed volatility that hasn’t been seen for several months. The S&P 500 began the week at 3,508, rose 2.5% to 3,587 on Wednesday, fell -3.7% to 3,455 on Thursday, and after falling to an intraday low of 3,374 (-6.0% from Wednesday’s high) closed at 3,427 on Friday. On the week, the index lost -2.3%, not that exciting at first glance, that is, until you view the intraday movements. Most of the downward pressure was in the tech and stay-at-home sectors which had run-up significantly over the prior several sessions. In bond-land, longer-term interest rates spiked upward in reaction to what looks to be a very misleading labor market report. We’ll see this week if the volatility was due to technical factors (some significant players selling), or if market players want to see better valuations before committing more cash.
The Labor Market Reports
The second set of economic events were centered around the labor market. On Wednesday, we had a disappointing ADP report which showed employment growth of only +482k in August. While higher than July’s +212k, the consensus was for +1 million. It is obvious from this report that businesses of all sizes and in all sectors have yet to come close to their pre-virus employment levels. Only 43% of job losses have been recouped.
On Thursday, the Initial Claims (IC) state unemployment data that made the headlines were the seasonally adjusted (SA) numbers which weren’t comparable to those of the prior week because of a significantly different SA process. Nevertheless, the numbers bandied about in the media used the inaccurate data. (see more on this below). On Friday, the BLS employment data complicated and further confused the labor picture. BLS puts the unemployment rate at 8.4%, and the number of unemployed at 13.55 million. The BLS’s survey was taken the week ended August 15. As shown in the chart and table below the state unemployment programs showed a slightly higher number for the same week 15.60 million). What’s missing is the PUA data, i.e., all the self-employed and independent contractors that are un- or under-employed. For the week of August 15, the state and PUA programs together showed more than 29 million unemployed!!
Even using the BLS data, those unemployed for 15+ weeks continued to rise and now stands at 8.1 million. The number of “permanent” job losses in this survey is 3.4 million. It has also become harder and harder to find a job as those who have been continuously searching for a job but have not found one for the past 15 weeks now stands at more than 60% of those unemployed for that length of time. That number was 8% in April.
State Unemployment Data
The SA figures from the Department of Labor for the week ending August 29 are quite misleading. Initial Claims (IC) were 881k, down -130k from levels on August 22. But the latter used a different seasonal adjustment (SA) process which upwardly biased the August 22nd numbers. Hence, the data is completely unreliable and incomparable. Using non-seasonally adjusted (NSA) data shows ICs rose slightly from 826k to 833k. So, don’t be deceived into thinking that the state IC data showed any progress at all. Where progress was shown was in the states’ Continuing Claims (CC) data where, NSA, claims fell by -765K, from 13.869 million (August 15) to 13.104 (August 22). As indicated in last week’s blog, this is a good indication that larger businesses have begun to recall their employees. Or it could be that the expiration of the extra $600/week in unemployment benefits has caused people to begin to return to work.
The same set of circumstances, however, is not true in entrepreneur-land. PUA data shows a whopping +2.598 million rise in CC (week ended August 15) and also a significant rise in the IC data (week ended August 22) of +151k (from 608k to 759k)). Likely, this was caused by the renewed lockdowns of late July/early August which impacted small businesses (bars, restaurants, salons…) heavily. (The ADP data, broken down by company size, confirms this.) Together, the state and PUA data show that unemployment was rising in mid-August, as the combined data showed a net +2.196 million more were in the unemployment lines. (29.225 million (August 15) v. 27.029 (August 8)).
The Fed is Still Worried
All the recent Fed speakers have been quite cautious, with most indicating that the Fed would remain extremely accommodative for a very long period of time. Fed Governor Lael Brainard, an economist in her own right, was quite to the point when she said: “[T]here’s lots of uncertainty that continues to cloud the outlook. Downside risks continue to be important.”
The Fed’s Beige book is the detailed survey of a significant number of businesses and sectors in all 12 Federal Reserve Districts which is used by the Federal Open Market Committee (FOMC), the rate setting arm of the Fed. The just released Beige Book will be relied upon in the upcoming September Fed meeting set. The Beige Book indicated that while there were gains in manufacturing, several “Districts…reported slowing job growth and increased hiring volatility, particularly in service industries, with rising instances of furloughed workers being laid off permanently…” In addition, “firms continued to experience difficulty finding necessary labor, a matter compounded by day care availability, as well as uncertainty over the coming school year and jobless benefits.” Most Districts reported a modest gain in economic activity, but all said the activity was well below pre-pandemic levels. Of equal importance, the Beige Book noted an erosion in credit on its member bank balance sheets (“Banks reported…increases in delinquency rates.’), and significant weakness in commercial real estate (“Commercial real estate markets have softened further – particularly for office and retail space.”).
High Frequency and Other Relevant Data
Restaurant activity is off 70% in NYC (WSJ, September 3, “Even Top Restaurants Fight for Survival”); In NYC, the Hilton, Times Square, shut down permanently (478 rooms). TSA counts have flattened of late (see chart: source TSA.Gov). Note that last year’s data shows a fall-off in TSA counts in July and August, so the flattening may be seasonal. Nevertheless, the most striking thing about this graph is the fact that air
travel remains stuck at about 25% of its prior year levels. It isn’t any wonder why we see that the airlines have threatened to lay off a significant number of pilots (UAL -2,850; DAL -1,941) and huge numbers of ordinary workers (UAL -36,000; AAL -17,500) if Congress doesn’t come through with additional funding by October 1. (Stay-tuned!) Other large companies have also announced significant layoffs including MGM (-18,000), and KO (-4,000).
The highest number of BKs in any year in modern times was 271 (publicly traded companies) in 2009. At the current pace, through September 2, the pace this year is exactly that, 271. I expect 2020 will easily break that record. Many of the recent filings are in the oil and energy exploration industries.
Financial market volatility returned after a couple month hiatus. Part was likely due to a needed correction, but part was surely a function of some very misleading labor market data. It is clear that, while some parts of the economy are doing okay, unemployment and the closures of small businesses haven’t yet shown up in the C (Consumption) and G (Government Spending) of the C+I+G+E = GDP (where I= Investment and E= Net Exports). The High Frequency data trends have flattened, and BKs continue at record levels.
Federal and state authorities have again extended eviction moratoriums. Millions of mortgage payments, credit card payments, and student loan payments have been missed. These have not yet shown up in bank data, but when the moratoriums end, they surely will. The Fed continues to be very worried. You should be too!
The Presidential election is less than 60 days away. There could be consequences for markets if there is no clear winner. But even if there is, the economy will then begin to feel the real pain of the Recession.
Robert Barone, Ph.D.
September 8, 2020
Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU)