Barron's - June 1, 2020
Lies, damned lies, and statistics, goes the old saying. Yet the worst thing about economic statistics isn’t just that they’re seasonally adjusted and otherwise massaged, it’s that they’re old as soon as they’re released.
Take the February employment report. Released on Friday, March 6, it showed a robust labor market with 273,000 workers added to payrolls and a 3.5% jobless rate, the lowest in a half-century. But by then, the coronavirus’ devastating impact already was being felt in the stock market. The following week, this column warned that second-quarter gross domestic product could see the most severe contraction on record. Like a meteorologist who forecasts heavy rain while flood waters already are rising, Wall Street banks subsequently slashed their GDP estimates to minus 20% or worse (after annualizing quarterly changes, another dubious practice that makes for exaggerated headlines).
Since then, attention has turned to “high-frequency data,” notably weekly filings for unemployment coverage, and to other nearly real-time numbers. Beyond the doleful daily tally of Covid-19 cases and deaths, analysts have seized on more-immediate data, notably those generated by smartphones, online searches, and traffic patterns. In other words, any signs of life, now that all 50 states have begun limited reopening of their economies.
Most media attention has been focused on weekly jobless claims, which have totaled over 40 million since the pandemic’s devastating economic effects began to appear two months ago. Far less notice went to tentative signs of improvement in the labor market.
Continuing claims for unemployment benefits plunged by about four million in the week ended on May 15 (these data lag a week behind the initial claims numbers), suggesting that a sizable number of folks have returned to work.
The latest edition of the Federal Reserve’s beige book, the summary of economic conditions from around the country prepared for the June 9-10 meeting of the Federal Open Market Committee, reports that employers are having difficulty hiring workers, despite a jobless rate likely to be about 20%— the worst since the Great Depression—when the May report arrives next Friday. Employers claim that many unemployed are getting more money than paychecks would provide—without the risk of contracting Covid-19 or the problem of finding child care. Together, the fall in continuing jobless claims and the anecdotes imply that the labor market might have seen its worst, though far more evidence is needed to confirm that.
Analysts are combing other data for clues. RBC Capital Markets economists Tom Porcelli and Jacob Oubina note a declining trend in Google searches for “file unemployment” as well as falling weekly federal unemployment insurance dollar payouts. They also see the jobless rate remaining at 20% or higher in May and beyond, in part because of the extra $600 a week in pandemic unemployment benefits, which expire at the end of July.
The Dallas Fed also has developed a Social Distancing Index, tracked from geolocation data from mobile devices. It spiked sharply in mid-March, as lockdowns took hold and economic activity plunged. Recently, the index began to decline, which could indicate that economic activity has bottomed and might improve. But the hole from the second-quarter plunge is so deep that even a huge bounce in the following quarters still would leave the economy down, on balance.
Evercore ISI has significantly upgraded its GDP forecast to 20% annualized gains in the third and fourth quarters—but only after a 40% collapse in the current quarter. As a result, GDP won’t top its 2019 peak until 2022.
Unemployment won’t go below 10%, EISI forecasts, until 2021’s third quarter. And the jobless rate will still be 14% in the September report, released just before the November election. At the same time, the firm estimates that consumer net worth probably has hit a new high, paced by the stock market’s recovery, continued rise in home prices, and surging bank deposits.
The rebound in equities has been the main factor, with the S&P 500 index finishing May with its best two-month gain since April 2009, some 17.79%, and a 36.06% rise since the March 23 low. Long-trailing financial stocks were standouts, with the Financial Select Sector SPDR exchange-traded fund (ticker: XLF) up 6.8% for the week.
J.P. Morgan strategists think the rotation rally in cyclicals and value stocks should continue over the next four to six weeks, with improvement in various purchasing managers’ indexes. But investors “should not overstay their welcome in the bounce” that could peter out by summer if labor indicators weaken. All the more reason to keep a keen eye on real-time data.
Write to Randall W. Forsyth at email@example.com
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