The Market Today

Economy Looses 700k Jobs in March, Unemployment Rate Rises to 4.4% – Tip of the Iceberg

by Craig Dismuke, Dudley Carter


Vining Sparks Economic Forecast Revision, April 2020

The coronavirus has wreaked more havoc on the U.S. economy than expected. We have now revised our growth forecast, penciling in a 7% contraction in 1Q followed by a 14% contraction in 2Q.  We note that they are in pencil because there remains is a high degree of uncertainty accompanying these projections.  We did not change our interest rate forecast, continuing to believe the most likely outcomes are Fed Funds near-zero through the middle of next year and the 10-year yield holding below 1.00% through 2020.  We will detail our forecast considerations in our 2Q Economic Outlook Webinar next Tuesday (register here).


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Economy Looses 700k Jobs in March, Unemployment Rate Rises to 4.4% – Tip of the Iceberg: The March jobs data disappointed expectations but is irrelevant at this point.  A surprisingly high 701k nonfarm payrolls were lost in March (economists expected -100k).  However, in the two weekly jobless claim reports subsequent to the March payroll survey week, a record 10 million people filed as newly unemployed.  While payroll losses of 700k is discouraging, the April report will be, by multiples, more discouraging.

By sector, job loss was clearly centered on the leisure sector.  With over 16 million jobs, the leisure sector accounts for 11.1% of all jobs. In the March data, 459k of those jobs were lost. Other sectors saw job loss, but nothing remotely as sharp as the loss of jobs in this sector.

Average hourly earnings rose 0.4% MoM bringing the year-over-year rate up to 3.1%.  That, however, was to be expected at the onset of a period of job loss and is not indicative of inflation pressures.

In the household report, the unemployment rate rose from its 50-year low of 3.5% to 4.4% as 1.3 million more people reported as unemployed.  Interestingly, 3.0 million fewer people reported as employed but more than half of those left the labor force altogether.

The drop in participation hit younger workers the hardest. Workers between 16 and 34 saw the largest declines in participation while there was also a notable drop for people over the age of 65. Leaving the labor force entirely means someone has lost employment and is not currently seeking re-employment.  Excluding the exodus from the labor force, the unemployment rate would have risen to 5.3%.

Also worth noting in the household report, the number of people working part-time for economic reasons, implying the economy is not strong enough to provide a full-time job, rose 1.45 million.  During the recovery from the Great Recession, it took an average of three years to make the improvement that was unwound in March alone.

Going forward, the unemployment rate should rise 0.6% for every one million lost jobs, assuming participation remains constant.  In our most recent forecast revision, we estimate that the unemployment rate will rise above 14% in 2Q.

ISM Service Sector Index: At 9:00 a.m. CT, the ISM Non-Manufacturing index is expected to plummet to its lowest level since the Great Recession.


Record Day for Oil Lifted Equities: U.S. equities recovered nicely Thursday despite a 6.6MM surge in unemployment claims and global cases of the coronavirus finally crossing the one million mark. A record day for crude prices played a crucial part in the equity surge as energy companies rose more than 9% to lead all 11 sectors higher. China reportedly planned to take advantage of decades-low oil prices and restock their storage facilities. Additionally, President Trump tweeted around 9:30 a.m. CT that he had spoken with Saudi’s Crown Prince and believed Saudi Arabia and Russia “will be cutting back approximately 10MM barrels and maybe substantially more.” Crude rocketed higher with WTI and Brent both gaining as much as 35% intraday. U.S. WTI ultimately settled up 25% in its biggest daily gain on record.

Tragic Job Loss Continues: Away from energy companies, other sectors notched more modest gains. The broader index briefly retreated to unchanged before reversing back higher to close up 2.3% near its high for the day. Keeping investors in check, jobless claims surged again, doubling the previous week’s 3.3MM to more than 6.6MM for the week ended March 28. While worse than even the highest estimate submitted to Bloomberg, the devastation wasn’t a complete surprise to investors who have spent weeks watching a growing share of the country be put under lockdown in an attempt to slow the virus’s spread. The tragic trend so far shows that more than 6% of the labor force, based on February’s figures, has filed for unemployment insurance in just the last two weeks. Treasury yields also proved resilient on Thursday with the 2-year yield rising 1.9 bps to 0.23%, the 5-year yield adding 3.0 bps to 0.38%, and the 10-year yield settling up 1.4 bps to 0.60%.

Tracking the Headlines: Global cases of the coronavirus crossed 1,000,000 on Thursday, an expected milestone considering the recent surge in cases across Europe and in the U.S. There continued to be talk by U.S. politicians about a possible fourth stimulus bill, but no definitive signal as to when that might occur. Treasury Secretary Mnuchin said he expects the first round of consumer payments to be direct deposited within two weeks. The Democratic National Convention was postponed until August. Michigan’s governor announced the state’s schools won’t reopen this academic year. Governors from Georgia and Tennessee announced statewide shelter-in-place orders. The CBO released an updated forecast projecting a 7% contraction in 2Q and unemployment in excess of 10%. President Trump said he would use the Defense Production Act to expedite production of medical supplies and parts for ventilators. There continued to be debate about whether the U.S. public should wear masks outside of their homes with several White House officials indicating related guidance could come within a few days.


Another China PMI Rebounds: Global markets continue to move unconvincingly in different directions, reflecting the significant uncertainty investors face as they wrestle with the question of whether or not they have appropriately discounted asset prices for the deep contraction that is sweeping through the global economy. Equity markets fell 0.5% on average across Asia while stocks in Europe and U.S. futures had pushed higher in the minutes leading up to the jobs reports, nearly erasing their overnight declines. While several data points from China reflect some recovery in March as the country attempts a gradual return to normalcy after months of quarantine, most of the rest of the world remains under strict stay-at-home orders in an effort to slow the spread of the virus. Several PMIs earlier in the week reported modest expansion for China’s manufacturing and services sectors in March. On Friday, a fourth private PMI from Caixin tracking services activity throughout China bounced as well to 43.0, but held below the neutral 50 level showing activity continued to contract, just at a slower pace.

More PMI Data Confirms Europe’s Deep Contraction: Evidencing the lagged economic damage resulting from the virus and related citizen lockdowns starting earlier in China before moving into Europe and the rest of the world, the Eurozone economy contracted sharply in March as China was attempting to recover. The first look at services PMIs from Italy and Spain, the European countries hardest hit by the virus to date, showed activity evaporated in March as both countries implemented nationwide lockdowns. Italy’s services PMI fell from 52.1 to 17.4 while Spain’s tumbled from 52.1 to 23.0, both the worst on records. Additionally, already record-low services PMIs for France and Germany were revised down further pulling the Eurozone-wide index down from 28.4 to 26.4 in revision.

Markets Hold Up Despite March Jobs Disappointment: In the U.S., the focus was on the March jobs report which, because of the timing of survey results, was expected to be the prelude to even more perilous job losses in the April data. While the actual job loss was worse than expected, markets held up relatively well after a knee-jerk pull back. U.S. equity futures are only modestly below levels prior to the jobs report with the S&P 500 down around 0.6% at 8 a.m. CT. Treasury yields actually inched higher despite the disappointment with the 2-year yield up 0.9 bps and the 10-year essentially unchanged on the day.

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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