Vice President, Equity Research and Analysis
This morning, the U.S. Bureau of Labor Statistics released unemployment statistics capturing the full effects of shelter-in-place mandates: in April, over 20 million jobs were lost, the highest monthly loss on record. This resulted in an unemployment rate of 14.7 percent, the highest since the Great Depression when unemployment was above 25 percent. In light of the over 30 million jobless claims since March, investors were already braced for shocking data.
Over the last decade, the consistency of job gains has been one of the best stories, if not the best story, of the U.S. economy. An entire decade’s worth of rising employment was wiped out in a single month. We have long argued that the consumer, and by extension employment, is the most important driver of the U.S. economy. With this in mind, the data released this morning is very sobering. However, there are a couple of reasons why the spike in joblessness might not be quite as bad for the economy as it seems, and it certainly does not compare equally to the Great Depression.
Source: U.S. Bureau of Labor Statistics
As a part of the CARES Act, all employees placed on temporarily leave or furloughed are eligible for full federal unemployment benefits. The government encouraged companies heavily impacted by the quarantine to furlough employees and many of them continue to pay furloughed employee health benefits. While we do not have a precise number, it is fair to assume that a very large percentage of those unemployed are also furloughed and will thus return to work swiftly once the economy reopens. There are jobs ready to be filled as soon as shelter-in-place mandates are lifted.
The CARES Act provides enhanced unemployment benefits that amount to approximately $600 per week in relief. Add in state unemployment benefits and those without a job now make more money than those working minimum wage. This removes the incentive for millions of minimum wage workers to return to the payroll. For some who are unemployed, they may have more money than they’d have if they were able to work a minimum wage job. So, purchasing power is not impaired to the degree suggested by headline unemployment figures. These enhanced unemployment benefits expire 30 days after the national state of emergency is ended. Once this period ends, the incentive to get back to work will be much stronger.
In the Great Depression, not only was unemployment nearly twice as high as today’s levels, this high unemployment persisted for a much longer time period. Joblessness was above 25 percent for over a year, above 20 percent for three years and above 10 percent for an entire decade. In the Depression-Era, Congress raised taxes and cut spending. The Smoot-Hawley Tariff Act went into effect, where mass tariffs were enacted against several critical trading partners and the Federal Reserve actually increased interest rates. The policy mix in the current downturn is the exact opposite. Congress passed the largest and most comprehensive stimulus bill in U.S. history and the Federal Reserve has cut interest rates to zero and indicated they have unlimited power to execute quantitative easing. Without a doubt, fiscal and monetary stimulus will dampen the magnitude of the recession and hasten the recovery.
Media commentators have embraced a narrative that the economy and stock market are entirely disconnected. The fact that the market is rising today despite the shocking employment figures will surely fan those flames. To a degree, we too are surprised at the pace the market has recovered since the lows on March 23 and continue to believe there will be an opportunity to buy stocks at lower levels. That said, we are not surprised to see the market hold ground in the face of today’s employment news. As a reminder, the market is a discounting mechanism. In other words, today’s market price reflects expectations of future economic activity. By gaining ground today, the signal is clear… unemployment figures were expected to be this bad, or perhaps even worse. If your child tells you they flunked a class and you punish them, you probably will not punish them a second time when the report card finally arrives in the mail.
Week in Review and Our Takeaways
Since 2010, the U.S. economy has added 20 million jobs; the same number of jobs were lost in the month of April
At this time, the severity of the downturn and government response look nothing like the Great Depression
The employment news this morning did not rattle the market because investors were expecting the data to be just as atrocious as it was