The Economy Is In Reverse

Economy Slowing?

Investors were eagerly awaiting this jobless claims report because the economy appears to have weakened in the 2nd half of June due to COVID-19. There is also the fact that in mid-June we reached the end of most of the states reopening. We had an initial burst every time a state reopened. Those bursts ended when basically every state had opened. Spikes in COVID-19 cases in the south and west reversed the trend. The reasons for such weakness are very obvious.

The main question is how weak the economy gets and how long this new trend lasts. That answer depends on what fiscal stimulus the government passes and when COVID-19 is brought under control. The government extended the PPP program until August 8th, but the GOP doesn’t want to extend the $600 weekly federal unemployment benefit program. 

Hopefully, when this program ends on July 25th, COVID-19 is under control and people go back to work in droves. If they don’t, their incomes will take a huge hit. COVID-19 cases are so high right now that by the time we reach the fall, America will still partially be dealing with the first wave. If there is a 2nd wave, it will be a disaster.

Another Weak Jobless Claims Reading

In the week of June 27th, initial jobless claims only fell from 1.482 million to 1.427 million. That’s a 3.7% decline. Prior week had a 3.8% decline and the week before that had a 1.7% decline. We calculated that it would take 10 weeks for initial claims to get below 1 million if they fall at a 3.7% clip. 

If you used the 3-week average, it would take even longer. Then look to see if the spike in COVID-19 cases caused initial jobless claims to stop falling. That’s tough to tell because while this report was weak, it has been weak for 3 weeks which goes back to before COVID-19 started causing states to reverse their opening plans.

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If COVID-19 isn’t impacting the data yet, but ends up doing so, we could be looking at an increase in jobless claims which will definitely cause stocks to decline. Specifically, claims rose the most in California and they fell the most in Oklahoma and Kentucky. 

Remember, more than a third of America’s GDP is impacted by this spike in COVID-19 cases. States hurt by COVID-19 probably will weaken more than the states that are handling COVID-19 well will improve.

When you add in PUA jobless claims, there were 2.3 million in total. Last week the total increased 5% and this week it fell 2%. In the 2nd week of June, it fell 1% which means it has basically not changed at all in the past 3 weeks. There were 839,000 PUAs this week which was down 42,000. 

Speaking of not improving, continued claims in the week of June 20th actually increased from 19.21 million to 19.29 million which was the first increase in 4 weeks. This week’s data is likely before the increase in COVID-19 cases, signaling there was a problem before this.

Small Businesses Lose Confidence

Small firms have less confidence according to the last 2 small business pulse surveys. The chart below shows the percentage of small firms reporting increases in hours worked and paid employment. From the week of June 13th to the week of the 27th, those reporting an increase in hours worked fell from 13.1% to 11% and those reporting an increase in paid employment fell from 10.2% to 8.9%. 

Some people might be wondering why the June jobs report was so good. It’s because the survey week was the peak in activity. Many are betting the July jobs report will be much worse. This explanation shows why stocks didn’t rise on Thursday despite the blowout report.  

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COVID-19 Keeps Getting Worse

If you want to know how bad COVID-19 is, don’t look at the stock market. We must look at the data. When investors ignore risk, they get hurt. They think they are being safe by buying tech stocks, but when a valuation is very high, the investment is not safe. On Thursday, there were 51,907 new cases which was another new record high. 

As you can see from the chart below, national hospitalizations bottomed on June 15th. They are up about 10,000 or 37% in 3 weeks. Hospitalizations are the highest since late May.

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This will probably lead to higher deaths in mid-July, but new deaths won’t come close to the record high in April because of better treatment. A problem for the economy is people won’t be going out as much because they don’t want to get sick. People really don’t want to go to the hospital amidst this pandemic.

Blowout Jobs Report

Monthly June jobs report destroyed expectations. Survey week was approximately the peak in economic activity which means this report less exciting. Either way, there were 4.8 million jobs created which beat estimates for 3 million. Plus, last month’s report was revised to show 2.699 million jobs added which was above the original report which said there were 2.509 million jobs added.

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As you can see from the chart above, the past 2 reports have made up significant ground. There are still 14.7 million fewer jobs than there were before the recession. If the labor market slows in July, it could extend the expectation as to how quickly the jobs will be recovered. 

At June’s pace, the economy could get all the jobs back in about 3 months, but that pace is not going to continue. This was the peak in job creation for the expansion. The unemployment rate fell from 13.3% to 11.1% which beat estimates for 12.4%. Remember, for stocks the best-case scenario is a high unemployment rate that’s falling. 

One issue is the stock market has priced in a full recovery before it has happened. Furthermore, we are seeing extreme speculation in tech as if we are at the end of a cycle, not the beginning of one. Some say tech stocks can’t fall because the cycle just started. That’s extremely false.