Bad Jobless Claims Report

The Jobless claims report was terrible. That’s not what you want to see if you’re a bull, because stocks have rallied so much on the premise that a recovery is guaranteed.

Yet, it’s far from guaranteed. Investors think that because the recession was man made (the shutdowns), it can be reversed easily. Technically, every recession is man made. This was the deepest recession since the Great Depression.

A big issue is, if the recovery stalls out, we will be in a worse situation than the troughs of most recessions. Secondly, there is no proof the economy will go back to normal. We’ve just picked the low hanging fruit.

Obviously, growth will improve from nothing. The question is if it can continue to improve. Many thought this would be a quick recovery, but when that’s priced in, you can’t win if you’re right and you lose if you’re wrong. The bet doesn’t have a good risk reward.

This jobless claims report was bad because there were more claims than expected, continued claims increased after falling, and the prior reading was revised higher. That’s the worst possible combination. Remember, initial claims can’t possibly be any higher. The spike was so high in March and April, that claims had to fall, especially with the economy reopening and the backlog of claims being worked through. 

A decline is a given. We need a sharp decline for the labor market to normalize. The unemployment rate is around 20% and we are still seeing more claims than ever before (this recession). That’s a very bad situation, which isn’t priced into stocks.

Details Of The Jobless Claims Report

The prior week’s report was revised higher from 2.123 to 2.126 million initial claims. In the week of May 30th, there were 1.877 million claims. This extended the record long streak of declines, but it was above the consensus of 1.79 million and the highest estimate, which was 1.8 million.

That was an 11.7% decline from the prior week. That past week had a 13.1% decline, which is obviously better. The trend is towards lower declines, which makes sense, because the amount it can fall is becoming more limited.

Continued claims are more important than initial claims because we are trying to see how many people are coming off benefits. As states reopen, some people are being forced off benefits. Last week had the first decline in continued claims of this recession, which led some to think the recession was over. We need three declines in a row to proclaim the recession is over. 

Since claims rose in the week of May 23rd, the streak needs to start over again. That being said, it wouldn’t be surprising if the recession ends in June. However, the recovery might not be as smooth as the market thinks.

As you can see from the chart above, the number of continued claims rose from 20.84 to 21.49 million, which still put it below its peak two weeks ago. To be clear, the big decline in the last report was related to a few states like California, Florida, and Washington reopening. The decline actually wasn’t that large. 

That’s why it makes sense the number increased slightly. Weeks were closer than it looks. That means the total might be stabilizing. That’s bad news for stocks because they expected better. The market priced this recovery for perfection. It’s almost impossible to achieve perfection in one of the most uncertain economies in American history.

Job Cut Announcements Plummet, But Remain High

In May, job cut announcements fell from 671,219 to 397,016. The chart below shows growth is literally off the page. The six month average of yearly growth is about 330%. This was the second most cuts ever in a month. There have been 1.4 million cuts this year, which is 389.5% more than last year. There were 1.96 million cuts in 2001, which was the most ever. This year is set to shatter that record. 

It’s almost impossible for that record to not be broken. Cuts in 2020 are 9.8% higher than the peak of the financial crisis. Most cuts were in entertainment and leisure, which had 163,680 in May. Retailers were second at 151,416. There were 8,091 cuts in media, which is the most on record. While other categories improved, this one got much worse. It’s sad to see these cuts, because we need the media now more than ever.

Unsurprisingly, the cuts were mostly because of COVID-19, as 984,073 of the 1.4 million were due to the virus this year. The chart below shows total cases in North Carolina. As you can see, the narrative that the states reopening isn’t causing a spike in cases is wrong.

New York’s improvement makes the national data look better than it is. America hasn’t clamped down on the virus as well as other countries. New York has done well, but it’s not open yet. That happens on Monday.

The West was the hardest hit by cuts, as California had 202,390 cuts alone. Other regional totals were all near 50,000. Hiring plans fell dramatically from April, which is terrible news.

Industries that saw a spike in demand, such as staples and online shopping, announced hiring plans in March and April. Now that they already hired people to meet demand, there aren’t any new companies making announcements. 

Hiring announcements fell from 824,610 in March to 285,639 in April. It went from a record reading to a strong one. Now, the number is weak, as it fell all the way to 38,981 in May. COVID-19 caused 32,000 hires in May.

In other words, there were almost no new hiring announcements from businesses in May, other than the ones seeing improved demand because of COVID-19. This shouldn’t inspire confidence from the bulls, as stocks are pricing in an easy quick recovery.