You will hear a lot of reports about how the economic statistics for April (released in May) will be “the worst since the Great Depression” or “the lowest on record,” and that will all be true, but the Great Depression was a 12-year nightmare in which the jobless rate was over 14% for a decade, reaching 25% in 1933. From 1931 to 1940, the jobless rate never dipped below 14.3% for any one full year. It was over 20% for four straight years, 1932-35. That won’t be the case this time around – not even for one full year.
The big news last Friday was that the Labor Department reported that the unemployment rate soared to 14.7% in April, up from 4.4% in March, a leap of over 10% in just one month. That has never happened before. But it was an artificial leap, mandated by government policies forcefully shutting down most of the economy. Those jobs will likely return to normal just as rapidly sometime later this same year.
Just two months ago, in February, the unemployment rate was at a 50-year low of 3.5%, but the Labor Department reported that 20.5 million payroll jobs were lost in April, which was significantly lower than the economists’ consensus estimate of 22.1 million jobs lost. Interestingly, 1.5 million medical jobs were lost in April as many dentists’ and doctors’ offices were closed. Also fascinating is that average hourly earnings soared by 4.7% (or $1.34 per hour) in April to $30.01 per hour as many low-wage workers lost their jobs. Overall, this horrific payroll report could have been a lot worse, but the real key will be how fast the unemployment rate will drop in the upcoming months as states reopen their respective economies.
In parallel, ADP reported on Wednesday that 20.2 million private sector jobs were lost in April. Believe it or not, this was better than analysts’ estimate of 22 million job losses. Service industries, like hotels and restaurants, lost 80% of all jobs lost (16 million) in April. One sad fact is that healthcare companies lost one million jobs due to a sharp decline in treatments and appointments for diseases other than Covid-19.
On Thursday, the Labor Department reported that there were almost 3.2 million new jobless claims in the latest week, bringing the total to 33 million jobless claims in the past seven weeks. Some states, like California, have already run out of unemployment insurance and have had to resort to borrowing from the federal government. That makes it imperative that 20 million or more people go back to work in the next few weeks. Otherwise, the jobless rate will remain unbearably high, which will slow any future recovery.
In other news, the Institute of Supply Management (ISM) reported on Tuesday that its service index plunged to 41.8 in April, down from 52.5 in March. This is the lowest level in 13 years and breaks 112 consecutive months of readings over 50, which signals an expansion. Only two of the 18 industries surveyed, namely finance and government, expanded in April. The ISM business activity component plunged to its lowest level since records began in 1997. The flip side is that since many states are now reopening, the ISM service index is expected to improve in May, but will likely remain below 50 for a few more months – as long as some major states like California and New York remain shut down.
The other big economic news released Tuesday was that the U.S. trade deficit soared by 11.6% in March to $44.4 billion, up from $39.8 billion in February. Specifically, exports plunged by 9.6% to $187.7 billion, while imports declined 6.2% to $232.2 billion. Interestingly, the trade deficit with China shrank by 21.3% to $15.5 billion in March, down from $19.7 billion in February. In the past 12 months, the trade deficit with China has shrunk by 35%. The consumer demand for iPhones and other electronic items has dropped precipitously, so the trade deficit with China may remain under pressure. Also notable is that the worldwide demand for vehicles has plunged, which significantly reduced both exports and imports. The April trade deficit will also decline, so the first sign of improvement may have to wait until May or June.
It’s very clear that some states have hardly any coronavirus cases and should open up soon, while two adjoining states (New York and New Jersey) have suffered nearly half of all coronavirus deaths in the U.S. As a result, some states could have “V” shaped recoveries while other regions will be slow to recover, and the overall economy will look more like a “U” shaped recovery, with a longer bottom-formation.
In addition, I must add that Michigan Governor Gretchen Whitmer, who has been under intense criticism for her detailed stay-at-home orders, surprised many observers by announcing on Thursday that auto plants and other manufacturing workers can return to work on Monday, May 11th. The economic pressure to reopen the U.S. economy remains intense. It appears that more governors will follow Whitmer’s example and cave to economic pressures, especially as state unemployment funds continue to be depleted.
The same is true overseas. Asia is already coming back into production with fewer coronavirus cases per capita than Europe or North America. Within Europe, Germany is striving to get back to normal as fast as possible, even though other European countries, like Britain and France, will be much slower to reopen.
Although last week’s rally was impressive, unfortunately, trading volume was light, so I expect that the overall stock market will continue to be narrow and bumpy in the upcoming weeks, so I’ll be looking for stocks with the best outlook for earnings in targeted industries and regions with a positive growth outlook.