America's Unemployment Is Falling Already
- This isn't perhaps what we were expecting and it's at least partially a conceit of the figures but it is true, unemployment is now falling.
- We are still seeing huge numbers moving into unemployment - but larger numbers moving out of it.
- Much, much, too soon to say it's all over but the wilder claims of imminent disaster are misplaced.
Our basic question here
We know the economy is bad right now - we've deliberately, by design, closed down large pieces of it, how could the situation be otherwise than bad? But that's not what we want to know. Rather, we're interested in two further things - how bad and how long?
That the economy even comes to a full halt isn't that bad a thing. It pretty much does so every Friday night and starts up again every Monday morning after all. This really is true enough that we have to be careful with month to month economic statistics, a month with an extra Sunday in it will vary them just for that reason alone. And of course, the economy does more than just stutter each holiday season, winter and summer.
The how long therefore matters, we know we can deal with a week or three of slowdown, and can deal with even a near-total halt for a few days.
On the other hand, losing 25% of the economy for 6 months would be a significant blow. More than anything else we'd expect not to be able to bounce back. That "human capital" that Kevin Hassett mentioned wouldn't survive unscathed for that period of time and so we'd all be less productive when we did return. If we're less productive the economy is smaller, we're poorer and the right level for the stock markets is lower - that last being what we're interested in here as investors.
So, how long and how deep?
Unemployment is falling
Sure, part of this is an artefact of the figures. This doesn't include all of the work being done to minimise jobs losses with government support and so on. It also doesn't include those - some 6 million at last count - who went unemployed and simply left the labor force altogether, rather than claim unemployment. But it is still true, unemployment is falling:
In the week ending May 23, the advance figure for seasonally adjusted initial claims was 2,123,000, a decrease of 323,000 from the previous week's revised level. The previous week's level was revised up by 8,000 from 2,438,000 to 2,446,000. The 4-week moving average was 2,608,000, a decrease of 436,000 from the previous week's revised average. The previous week's average was revised up by 2,000 from 3,042,000 to 3,044,000.
No, that's not the bit that shows it. A reduction in the number of new claims does not show that unemployment is falling, it just shows that the rate at which unemployment is increasing is falling. The difference between speed and acceleration there.
(Unemployment claims from Moody's Analytics)
The interesting part of this is:
The advance seasonally adjusted insured unemployment rate was 14.5 percent for the week ending May 16, a decrease of 2.6 percentage points from the previous week's revised rate. The previous week's rate was revised down by 0.1 from 17.2 to 17.1 percent. The advance number for seasonally adjusted insured unemployment during the week ending May 16 was 21,052,000, a decrease of 3,860,000 from the previous week's revised level.
Or perhaps we'd prefer this chart:
(Unemployment claims from Dept of Labor)
Initial claims and continuing
Something to understand about unemployment. The number of initial claims is an interesting but not very important number. That's the number laid off in any one week. Continuing claims is the important number, as that's the number of people who still cannot find a job.
It's possible for us to have vast, truly huge, initial claims each and every week but if everyone gets a job in a few weeks then that's just showing that the economy is vibrant and changing. It's also possible to have low initial claims but very high continuing unemployment. Anyone who loses their job just can't get another one and that would be much worse.
It's also worth noting that as a rough guide we expect a decent economy to be killing off 10% of all jobs every year and creating some 10% entirely anew. This is just the rate at which some companies shrink, go bust, reorganise, and others start and grow. In fact, the higher this rate is then the more vigorous we think the economy is.
A high separations rate, even a high initial claims rate, can be a sign - can be, note - a signal of a booming economy.
So, what's happening here?
What is actually happening is that we are seeing that high separations rate. It's clearly from people being fired as you generally don't get unemployment insurance if you quit for another job. So, the inflow into unemployment is high even if the rate itself is decreasing.
On the other hand, we're seeing more people being hired out of unemployment than are entering that state. Thus, the number of people in total unemployed is falling.
Taken together this shows that the turnover of jobs is remaining high, even as unemployment itself falls.
Now, yes, this doesn't include those who lost their jobs and just aren't bothering to try and find another one. There are, we think at least, some 6 million of these. And there's undoubtedly something going on with the varied job support schemes. The US isn't doing as much as much of Europe is but whatever is being done won't have reached the statistical offices yet and the way they calculate the numbers.
Yet this is promising
We can look at this in one of two different ways. One position would be that sure, lots of jobs have gone, but American capitalism is vibrant enough that it's creating new jobs doing something else which isn't as dependent upon that human contact not allowed in lockdown. That's a nice story and there's certainly some truth to it but not much in my opinion.
The other tale is that the lockdown is already finishing in some places, or people are at least preparing for it to do so, so folks are getting hired again.
Either story explains those numbers. And the numbers themselves also tell us something else. The slump isn't going to be as deep as many seem to think. Nor is it going to last as long as those same seem to think.
If the unemployment rate is already falling then we're through, by this measure at least, the worst already.
I have said all along that I think this recession - depression, whatever - is going to be deep and short. The recovery from it is going to be swift. We're not going to get back to exactly where we were and it'll take a couple of years perhaps to catch up on the lost growth. But the long-term effect of this recession is going to be minimal, whatever the short-term pain.
The investor view
The markets are still uncertain. After all, there are enough who really do believe this is the final crisis of Western Capitalism, etc. And there's always the possibility that someone could get elected to prove it to be so. That means that current market prices are somewhere between correct for this being a long-term disaster and this being a short-term one we'll quickly recover from.
We as investors know that the price of a stock is the net present value of the future income stream. A wobble now and a return to decent GDP and profits growth shouldn't mean that much to a current stock value. A long-running slowdown would.
That is, the more evidence we get that this is as bad as it gets and also that it's not going to last then the more undervalued the markets look. Simply because there's still that element in current prices that it's going to be deeper and longer.
As with long-running advice here, assuming all the above is true then now is the time to be buying into big and boring. Good solid dividend yields at rates we'll not see once the recovery is fully priced in.
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