In the week ahead, America will be focused on the killing of George Floyd and its aftermath. These are difficult days for our country, beset as we are by a pandemic, a deep recession, political division and racial tension. When I arrived in America as a young man, it seemed to me to be a vibrant patchwork quilt of a country—full of problems and division but also full of energy and optimism and generosity. It is at its best when we, as a people, patiently work to stitch the quilt closer together, reducing inequality, injustice and violence. Recently, the forces pulling us apart have seemed stronger. But just as there are cycles in the economy, so there are cycles in politics and society and there will be many better years ahead than 2020.
Still, we can’t, unfortunately, fast forward this movie to those better years and, for investors and those advising them, it is still important to understand the nature of the recession into which we have fallen. While this has been a recurring theme in recent months, every few days we get new information, which can help us track both of the depth of the downturn and the speed of a potential recovery.
Last week’s numbers on consumer spending, durable goods, inventories and international trade gave us a better understanding of just how far we have fallen. In particular, real consumer spending fell 13.2% in April following a 6.7% March decline. This was worse than expected and, even with a substantial recovery in May and June, we expect real consumer spending to fall an extraordinary 43% annualized in the second quarter. This, combined with weaker trade and inventory data, suggests that real GDP overall could fall by roughly 41% annualized in the second quarter of this year, before rebounding by 18% annualized in the third.
It should be emphasized that the apparent strength of this rebound is largely a reflection of the depth of the downturn, particularly in April of this year. Moreover, we continue to expect that the economy will only show true acceleration when a vaccine has been widely distributed. Because of this, while real GDP could fall 13.7% in absolute terms from its cyclical peak at the end of last year to the second quarter of this year, it may only gain back a quarter of this extraordinary decline in the third quarter and output could still be lower in the fourth quarter of 2021 than in the fourth quarter of 2019.
Employment is also a story of only partial improvement following a very big decline and the decline probably didn’t end in April.
Predicting the key numbers in this Friday’s jobs report is particularly difficult but this is why these numbers are important. The April payroll number, which showed a 20.5 million decline in jobs, was probably accurate enough. Continuing unemployment claims rose by just over 3 million between the April and May survey weeks, suggesting a further substantial decline in employment in the May report. However, we know that the state unemployment benefits systems were overwhelmed at the start of the crisis, suggesting that the April continuing claims number underestimated job losses and probably by more than was the case in May. For this reason, we expect payrolls for May to fall by a little less than 3 million jobs.
The unemployment rate may, however, show greater deterioration between April and May. In April, the labor force fell by 6.4 million people following a 1.6 million decline in March. Many of these people however, were probably ready and willing to work but were classified as “not in the labor force” because they had not actively searched for a new job. Some of this group may have returned to searching for a job in May, causing a partial rebound in the labor force. More of this group will likely actively engage in job searching in August, if the current $600 weekly supplement to unemployment benefits expires without being fully replaced.
In addition, the Bureau of Labor Statistics reported that, despite special instructions to its field staff, a large number of respondents to its April survey misclassified themselves as being “employed on temporary layoff” instead of “unemployed on temporary layoff”, resulting in a shortfall of about 7.5 million people in the second category. If the message has finally gotten through to the field staff we expect a large number of these people to be transferred to the rolls of the unemployed in May. Finally, the availability of pandemic unemployment assistance for gig workers may boost the number unemployed, as workers who would normally have no choice but to work even a few hours instead abandoned their jobs to get some unemployment benefits.
Overall, we expect that the labor force will rise by roughly 1 million while the total number of people recorded as being employed will fall by roughly 7 million, boosting the unemployment rate from 14.7% in April to 19.8% in May.
It should be noted, finally, that this implies that, between February and May, total payroll employment fell by 24.0 million jobs while the number of unemployed people rose by 25.5 million. Both of these numbers, while horrific in themselves, are substantially lower than cumulative initial unemployment claims of over 40 million since mid-March. This latter number, although widely quoted in the press, is simply not an accurate measure of joblessness since it includes many unemployment claims which were denied as people applied to the wrong program and ignores many people called back to work or who found new jobs in the last few months.