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Lingering High Unemployment Will Cripple Consumer Spending

Lingering High Unemployment Will Cripple Consumer Spending
(Andrii Yalanskyi/Dreamstime)

By Wednesday, 03 June 2020 02:25 PM Current | Bio | Archive

INDICATOR: May Private Sector Employment and NonManufacturing Activity

KEY DATA: ADP: -2.76 million; Large Businesses: -1.6 million/ ISM (NonMan.): +3.6 points; Activity: +15.0 points; Employment: +1.8 points

IN A NUTSHELL: “The May numbers are bad, but given what happened in April, they look pretty good.”

WHAT IT MEANS: Everything is relative. Take the employment numbers. Given the massive layoffs in April, almost anything would look good and the employment services company ADP indicated that payrolls continued to fall massively in May. But the level is about one-seventh what we saw in April, so it will likely be viewed as a good number. It was below forecasts, but this number was almost impossible to estimate. With some firms opening and others cutting workers, the ebb and flow, coupled with seasonal factors that are meaningless, make understanding what is going on in the labor market really difficult. That said, there are some really important takeaways from the data. The large number of unemployment claims pointed to firms continuing to cut back. We should have seen most of that happen in April, but large companies continue to reduce payrolls dramatically. The share of payroll reductions rose from 47.7% in April to 58.1% in May. That is not good news for the future, as large companies will likely be slow in rehiring. As I have noted, there are so many issues with the employment data right now that any jobs forecast merely represents a wild guess. My number for the Friday report was and continues to be down 3.3 million, but don’t bet the ranch on that.

The Institute for Supply Management reported that nonmanufacturing activity declined less rapidly in May. Everything is still contracting; it’s just that it is doing so at a somewhat slower pace. That is a product of the slowly reopening of the economy. On the positive side, the orders downslide is starting to ease. It is still dropping rapidly, but it is no longer in free fall. The one truly disturbing number was the employment index. It was up modestly and the level points to significant cut backs in employment in the months to come.

IMPLICATIONS: Employment Friday is two days away and it is very likely that payrolls were cut again dramatically in May. Think about this: If we get about 3 million down, that would have been viewed in the past as being a really bad year, not just a horrible month. But if you expect a number two or three times that amount, then it could be considered as OK. That is how strange a world we are in, where losing a few million jobs is not terrible. But it is hard to fully understand what is going on right now and thus we need to sit back and think, not react when the number comes out. That is true for the unemployment rate as well. The survey week contains the twelfth of the month and it is not clear how much reopening actually occurred by then. Also, the April report missed the layoffs that occurred over the rest of the month, so it likely underestimated the true state of unemployment. I expect the May rate to be about 20% and I am not sure that will be the peak. The employment indices in both the ISM manufacturing and nonmanufacturing reports were so low that it looks like we are in for even more increases in June. That is what concerns me. We can open up the economy all we want, but if there is double-digit unemployment for an extended period, consumer spending levels will not be able to come close to where they had been. Will investors recognize that? Got me.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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JoelNaroff
The share of payroll reductions rose from 47.7% in April to 58.1% in May. That is not good news for the future, as large companies will likely be slow in rehiring.
jobs, economy, virus, factory, recovery
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2020-25-03
Wednesday, 03 June 2020 02:25 PM
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