How Bad Will Unemployment Get, and How Might It Rebound?

Unfortunately, but unsurprisingly, there was a record number of jobs lost in April. The total jobs lost, 20.5 million, is so large that any discussion of it being above or below expectations is a bit silly. In fact, both because of its absolute number and also difficulty in conducting surveys in this environment, there is a high error rate to this survey. Still, there are some details in the employment surveys that give us clues to what to expect going forward. Here are my takeaways. Low Wage Workers Are Getting Crushed Year over year, the average hourly wage jumped a shocking 7.9%. Of course, it didn't really. What has happened is that the pool of people included within that statistic has changed. AHE is calculated in a very simple way: how much was paid in total wages divided by how many people are on payrolls. So, if the bottom rung of employees gets sliced off, the average looks better. The takeaway from the jump in AHE is that lower wage workers are bearing the brunt of this recession. That is obviously dismaying from a human perspective. In the very short-term the silver lining is that the CARES Act allowance for more generous unemployment insurance benefits probably cushions this blow. In addition, the one-time $1,200 stimulus checks make a big difference to those at the bottom of the income spectrum. Both of these allow some of these laid off workers to keep paying their bills. That's crucially important on a number of levels, including general consumer spending, but also the solvency of apartment building owners, auto lenders, etc. The politics of the higher UI payments is difficult, and the ease of getting UI varies by state. It definitely isn't clear that more stimulus checks are forthcoming. What we've seen so far is relatively good consumer delinquency numbers from lenders and apartment REITs, at least relative to how bad it could have been. As this recession drags on, it isn't clear that will continue, and is definitely a source of risk. Layoffs Are Broad-Based Of the detailed non-government industry categories that the Department of Labor uses, only three out of 101 didn't experience net job losses. One of them was Monetary Authorities. As in, the Fed. On the other side, 41 of the 101 had 10% of more total employment declines. So, things are rough out there. Going forward we need to think about unemployment in three categories. People who aren't working now because their employer is partially or completely shut down (e.g., retail, airlines, restaurants), but their employer is still in business and intends to hire the person back. People who are in bucket #1 except their employer has permanently downsized or has gone out of business. People laid off in industries not actually shut down, but cost cutting due to general economy weakness. Right now, just based on looking at the industry-level job losses, I think around 80% of the layoffs are either in category #1 or #2. We can't really know right now how to divide between those two, but it is safe to assume #2 is growing. In #3 we see industries like Advertising, Fabricated metal producers, Business support services, etc., all seeing large percentage layoffs. Those are less about Covid-19 safety and more about the recession. How Bad Will Unemployment Get, and How Might It Rebound? Based on unemployment claims, I'd guess the unemployment rate is already about 2% higher (i.e., to 16.5%) if the survey were conducted today. If we include all those who dropped out of the labor force in the last two months, that swells to around 19.5%. While fresh unemployment claims have slowed down, they are still coming in at about 3 million per week, which implies around a 2% growth in unemployment each week. We'd hope that this continues to slow as states start to reopen. However, I would feel comfortable projecting unemployment to get to 20-25% before it starts recovering. Using my three categories above, we'd assume that anyone in category #1 will get their job back within six months of the economy reopening. I'd guess those in category #2 are long-term unemployed and are most vulnerable. However, I think the sum of #1 and #2 doesn't keep growing after the economy reopens. In other words, pretty soon everyone who was going to lose their job in shutdown industries will have already lost it. As a result, we'll probably get a very severe spike in unemployment followed by a quick reduction. Therefore, say we hit 25% in one month, three months later that's likely down to 20% and three months after that it is 16%. As an example, we imagine the restaurants that survive bring back half of their staff in the six months after reopening. That causes unemployment to drop quickly as these firms basically mass re-hire. However, for the other half that don't come back plus the restaurants that don't survive, those workers become long-term unemployed and need to wait for the whole food services business to fully recover. Meanwhile, for industries hit by the weak economy, and not Covid-19 per se, unemployment could keep growing. In a classic recession, net layoffs continue long after the economy bottoms. In the last recession, unemployment peaked in October 2009. In the recession prior to that, unemployment peaked in June 2003, almost two years after the recession was declared over. This recession will look different because of the unique nature of the shutdown/reopen cycle. Still, I think the workers in the #3 category will follow this classic pattern. If so, layoffs have only begun in these sectors and will continue for many months. Investment Implications There isn't a trade coming out of this jobs report, but there are two big implications for how we process incoming information going forward. First, both consumption and employment will be hard to track in the coming months. There could be a head-fake rebound followed by a slower decline. Second, everyone will be watching the rebound in the most impacted sectors as the economy reopens. You should be watching the less impacted sectors to see how deep this recession actually will be.

How Bad Will Unemployment Get, and How Might It Rebound?

The historic April jobs report provides clues on what to expect from here.

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